I'm currently building out a small web deployment using VM instances on MS Azure. The main problem I'm facing at the moment is trying to figure out how to get the load-balancing to detect if a particular VM has failed and not route traffic to that VM.

As far as I can tell, there are only only two load-balancing options:

1. Have multiple VMs (web01, web02, web03 etc.) within the same 'cloud service' behind a single VIP, and configure the endpoints to be load balanced.

2. Create multiple 'cloud services', put a single web VM in each and create a traffic manager service across all these services.

It appears that (1) is extremely simplistic and doesn't attempt to do any host failure detection.

(2) appears to be much more varied, but requires me to put all my webservers in their own individual cloud service. Traffic manager appears to be much more directed at a geographic failover scenario, where you have multiple cloud services across different regions. This approach also has the disadvantage in that my web servers won't be able to communicate with my databases on internal IP addresses, unlike scenario (1).

What's the best approach here?