The router couldnt care less what proxy settings you have, it works at a lower level in the OSI model:[
http://www2.rad.com/networks/1994/osi/layers.htm routers = layer 3, proxies/HTTP = layer 4 (afair)]
the problem is that your browser translates ALL requests into ones that it sends via the proxy INCLUDING ones for 192.168.1.1 ( i.e. it asks the proxy for that web page ), you need to set it to ignore local addresses, or ignore 192.168.1.1 specifically if you like ( as has been said )