diff --git a/pkg/controller/machine/controller.go b/pkg/controller/machine/controller.go
index 8b84b7e0ab..a68208aa96 100644
--- a/pkg/controller/machine/controller.go
+++ b/pkg/controller/machine/controller.go
@@ -27,6 +27,7 @@ import (
 	corev1 "k8s.io/api/core/v1"
 	apierrors "k8s.io/apimachinery/pkg/api/errors"
 	metav1 "k8s.io/apimachinery/pkg/apis/meta/v1"
+	"k8s.io/apimachinery/pkg/apis/meta/v1/unstructured"
 	"k8s.io/apimachinery/pkg/runtime"
 	"k8s.io/client-go/kubernetes"
 	"k8s.io/client-go/rest"
@@ -434,7 +435,16 @@ func (r *ReconcileMachine) setPhase(machine *machinev1.Machine, phase string, er
 		}
 
 		// Since we may have mutated the local copy of the machine above, we need to calculate baseToPatch here.
+		// Any updates to the status must be done after this point.
 		baseToPatch := client.MergeFrom(machine.DeepCopy())
+
+		if phase == phaseFailed {
+			if err := r.overrideFailedMachineProviderStatusState(machine); err != nil {
+				klog.Errorf("Failed to update machine provider status %q: %v", machine.GetName(), err)
+				return err
+			}
+		}
+
 		machine.Status.Phase = &phase
 		machine.Status.ErrorMessage = nil
 		now := metav1.Now()
@@ -462,6 +472,45 @@ func (r *ReconcileMachine) patchFailedMachineInstanceAnnotation(machine *machine
 	return nil
 }
 
+// overrideFailedMachineProviderStatusState patches the state of the VM in the provider status if it is set.
+// Not all providers set a state, but AWS, Azure, GCP and vSphere do.
+// If the machine has gone into the Failed phase, and the providerStatus has already been set,
+// the VM is in an unknown state. This function overrides the state.
+func (r *ReconcileMachine) overrideFailedMachineProviderStatusState(machine *machinev1.Machine) error {
+	if machine.Status.ProviderStatus == nil {
+		return nil
+	}
+
+	// instanceState is used by AWS, GCP and vSphere; vmState is used by Azure.
+	const instanceStateField = "instanceState"
+	const vmStateField = "vmState"
+
+	providerStatus, err := runtime.DefaultUnstructuredConverter.ToUnstructured(machine.Status.ProviderStatus)
+	if err != nil {
+		return fmt.Errorf("could not covert provider status to unstructured: %v", err)
+	}
+
+	// if the instanceState is set already, update it to unknown
+	if _, found, err := unstructured.NestedString(providerStatus, instanceStateField); err == nil && found {
+		if err := unstructured.SetNestedField(providerStatus, unknownInstanceState, instanceStateField); err != nil {
+			return fmt.Errorf("could not set %s: %v", instanceStateField, err)
+		}
+	}
+
+	// if the vmState is set already, update it to unknown
+	if _, found, err := unstructured.NestedString(providerStatus, vmStateField); err == nil && found {
+		if err := unstructured.SetNestedField(providerStatus, unknownInstanceState, vmStateField); err != nil {
+			return fmt.Errorf("could not set %s: %v", instanceStateField, err)
+		}
+	}
+
+	if err := runtime.DefaultUnstructuredConverter.FromUnstructured(providerStatus, machine.Status.ProviderStatus); err != nil {
+		return fmt.Errorf("could not convert provider status from unstructured: %v", err)
+	}
+
+	return nil
+}
+
 func machineIsProvisioned(machine *machinev1.Machine) bool {
 	return len(machine.Status.Addresses) > 0 || stringPointerDeref(machine.Spec.ProviderID) != ""
 }
diff --git a/pkg/controller/machine/controller_test.go b/pkg/controller/machine/controller_test.go
index 3cf43202ad..0a3d34b6f4 100644
--- a/pkg/controller/machine/controller_test.go
+++ b/pkg/controller/machine/controller_test.go
@@ -326,10 +326,12 @@ func TestReconcileRequest(t *testing.T) {
 
 func TestSetPhase(t *testing.T) {
 	testCases := []struct {
-		name         string
-		phase        string
-		errorMessage string
-		annotations  map[string]string
+		name                   string
+		phase                  string
+		errorMessage           string
+		annotations            map[string]string
+		existingProviderStatus string
+		expectedProviderStatus string
 	}{
 		{
 			name:         "when updating the phase to Running",
@@ -345,6 +347,36 @@ func TestSetPhase(t *testing.T) {
 				MachineInstanceStateAnnotationName: unknownInstanceState,
 			},
 		},
+		{
+			name:         "when updating the phase to Failed with instanceState Set",
+			phase:        phaseFailed,
+			errorMessage: "test",
+			annotations: map[string]string{
+				MachineInstanceStateAnnotationName: unknownInstanceState,
+			},
+			existingProviderStatus: `{"instanceState":"Running"}`,
+			expectedProviderStatus: `{"instanceState":"Unknown"}`,
+		},
+		{
+			name:         "when updating the phase to Failed with vmState Set",
+			phase:        phaseFailed,
+			errorMessage: "test",
+			annotations: map[string]string{
+				MachineInstanceStateAnnotationName: unknownInstanceState,
+			},
+			existingProviderStatus: `{"vmState":"Running"}`,
+			expectedProviderStatus: `{"vmState":"Unknown"}`,
+		},
+		{
+			name:         "when updating the phase to Failed with state Set",
+			phase:        phaseFailed,
+			errorMessage: "test",
+			annotations: map[string]string{
+				MachineInstanceStateAnnotationName: unknownInstanceState,
+			},
+			existingProviderStatus: `{"state":"Running"}`,
+			expectedProviderStatus: `{"state":"Running"}`,
+		},
 	}
 
 	for _, tc := range testCases {
@@ -374,10 +406,18 @@ func TestSetPhase(t *testing.T) {
 					GenerateName: name,
 					Namespace:    namespace.Name,
 				},
-				Status: machinev1.MachineStatus{},
 			}
+
 			g.Expect(k8sClient.Create(ctx, machine)).To(Succeed())
 
+			if tc.existingProviderStatus != "" {
+				machine.Status.ProviderStatus = &runtime.RawExtension{
+					Raw: []byte(tc.existingProviderStatus),
+				}
+			}
+
+			g.Expect(k8sClient.Status().Update(ctx, machine)).To(Succeed())
+
 			namespacedName := types.NamespacedName{
 				Namespace: machine.Namespace,
 				Name:      machine.Name,
@@ -422,6 +462,11 @@ func TestSetPhase(t *testing.T) {
 
 			g.Expect(got.GetAnnotations()).To(Equal(tc.annotations))
 			g.Expect(machine.GetAnnotations()).To(Equal(tc.annotations))
+
+			if tc.existingProviderStatus != "" {
+				g.Expect(got.Status.ProviderStatus).ToNot(BeNil())
+				g.Expect(got.Status.ProviderStatus.Raw).To(BeEquivalentTo(tc.expectedProviderStatus))
+			}
 		})
 	}
 }