diff --git a/spring-web/src/main/java/org/springframework/web/client/RestTemplate.java b/spring-web/src/main/java/org/springframework/web/client/RestTemplate.java
index 19e42a30397..f88c41b7c16 100644
--- a/spring-web/src/main/java/org/springframework/web/client/RestTemplate.java
+++ b/spring-web/src/main/java/org/springframework/web/client/RestTemplate.java
@@ -855,7 +855,7 @@ public class RestTemplate extends InterceptingHttpAccessor implements RestOperat
 		Observation observation = ClientHttpObservationDocumentation.HTTP_CLIENT_EXCHANGES.observation(this.observationConvention,
 				DEFAULT_OBSERVATION_CONVENTION, () -> observationContext, this.observationRegistry).start();
 		ClientHttpResponse response = null;
-		try {
+		try (Observation.Scope scope = observation.openScope()){
 			if (requestCallback != null) {
 				requestCallback.doWithRequest(request);
 			}
@@ -869,7 +869,7 @@ public class RestTemplate extends InterceptingHttpAccessor implements RestOperat
 			observation.error(exception);
 			throw exception;
 		}
-		catch (RestClientException exc) {
+		catch (Throwable exc) {
 			observation.error(exc);
 			throw exc;
 		}
diff --git a/spring-web/src/test/java/org/springframework/web/client/RestTemplateObservationTests.java b/spring-web/src/test/java/org/springframework/web/client/RestTemplateObservationTests.java
index 97eb7fc5fef..2080b265ad0 100644
--- a/spring-web/src/test/java/org/springframework/web/client/RestTemplateObservationTests.java
+++ b/spring-web/src/test/java/org/springframework/web/client/RestTemplateObservationTests.java
@@ -39,9 +39,11 @@ import org.springframework.http.client.ClientHttpRequestFactory;
 import org.springframework.http.client.ClientHttpResponse;
 import org.springframework.http.client.observation.ClientRequestObservationContext;
 import org.springframework.http.converter.HttpMessageConverter;
+import org.springframework.lang.Nullable;
 
 import static org.assertj.core.api.Assertions.assertThat;
 import static org.assertj.core.api.Assertions.assertThatExceptionOfType;
+import static org.assertj.core.api.Assertions.assertThatIllegalStateException;
 import static org.mockito.ArgumentMatchers.any;
 import static org.mockito.ArgumentMatchers.eq;
 import static org.mockito.BDDMockito.given;
@@ -158,6 +160,31 @@ class RestTemplateObservationTests {
 		assertThatHttpObservation().hasLowCardinalityKeyValue("outcome", "UNKNOWN");
 	}
 
+	@Test // gh-32060
+	void executeShouldRecordErrorsThrownByErrorHandler() throws Exception {
+		mockSentRequest(GET, "https://example.org");
+		mockResponseStatus(HttpStatus.OK);
+		mockResponseBody("Hello World", MediaType.TEXT_PLAIN);
+		given(errorHandler.hasError(any())).willThrow(new IllegalStateException("error handler"));
+
+		assertThatIllegalStateException().isThrownBy(() ->
+				template.execute("https://example.org", GET, null, null));
+
+		assertThatHttpObservation().hasLowCardinalityKeyValue("exception", "IllegalStateException");
+	}
+
+	@Test // gh-32060
+	void executeShouldCreateObservationScope() throws Exception {
+		mockSentRequest(GET, "https://example.org");
+		mockResponseStatus(HttpStatus.OK);
+		mockResponseBody("Hello World", MediaType.TEXT_PLAIN);
+		ObservationErrorHandler observationErrorHandler = new ObservationErrorHandler(observationRegistry);
+		template.setErrorHandler(observationErrorHandler);
+
+		template.execute("https://example.org", GET, null, null);
+		assertThat(observationErrorHandler.currentObservation).isNotNull();
+	}
+
 
 	private void mockSentRequest(HttpMethod method, String uri) throws Exception {
 		mockSentRequest(method, uri, new HttpHeaders());
@@ -205,4 +232,26 @@ class RestTemplateObservationTests {
 		}
 	}
 
+	static class ObservationErrorHandler implements ResponseErrorHandler {
+
+		final TestObservationRegistry observationRegistry;
+
+		@Nullable
+		Observation currentObservation;
+
+		public ObservationErrorHandler(TestObservationRegistry observationRegistry) {
+			this.observationRegistry = observationRegistry;
+		}
+
+		@Override
+		public boolean hasError(ClientHttpResponse response) throws IOException {
+			return true;
+		}
+
+		@Override
+		public void handleError(ClientHttpResponse response) throws IOException {
+			currentObservation = this.observationRegistry.getCurrentObservation();
+		}
+	}
+
 }