diff --git a/lib/ansible/playbook/play.py b/lib/ansible/playbook/play.py
index a24c5fff1b..78f2f6d9ba 100644
--- a/lib/ansible/playbook/play.py
+++ b/lib/ansible/playbook/play.py
@@ -119,7 +119,11 @@ class Play(object):
         temp_vars = utils.combine_vars(self.vars, self.vars_file_vars)
         temp_vars = utils.combine_vars(temp_vars, self.playbook.extra_vars)
 
-        ds = template(basedir, ds, temp_vars)
+        try:
+            ds = template(basedir, ds, temp_vars)
+        except errors.AnsibleError, e:
+            utils.warning("non fatal error while trying to template play variables: %s" % (str(e)))
+
         ds['tasks'] = _tasks
         ds['handlers'] = _handlers
 
diff --git a/lib/ansible/utils/template.py b/lib/ansible/utils/template.py
index 998e55f1f3..9426e254eb 100644
--- a/lib/ansible/utils/template.py
+++ b/lib/ansible/utils/template.py
@@ -118,7 +118,10 @@ def template(basedir, varname, templatevars, lookup_fatal=True, depth=0, expand_
 
         if isinstance(varname, basestring):
             if '{{' in varname or '{%' in varname:
-                varname = template_from_string(basedir, varname, templatevars, fail_on_undefined)
+                try:
+                    varname = template_from_string(basedir, varname, templatevars, fail_on_undefined)
+                except errors.AnsibleError, e:
+                    raise errors.AnsibleError("Failed to template %s: %s" % (varname, str(e)))
 
                 if (varname.startswith("{") and not varname.startswith("{{")) or varname.startswith("["):
                     eval_results = utils.safe_eval(varname, locals=templatevars, include_exceptions=True)
@@ -188,11 +191,7 @@ class _jinja2_vars(object):
         if isinstance(var, dict) and varname == "vars" or isinstance(var, HostVars):
             return var
         else:
-            try:
-                return template(self.basedir, var, self.vars, fail_on_undefined=self.fail_on_undefined)
-            except:
-                raise KeyError("undefined variable: %s" % varname)
-
+            return template(self.basedir, var, self.vars, fail_on_undefined=self.fail_on_undefined)
 
     def add_locals(self, locals):
         '''