diff --git a/payload_generator/deflate_utils.cc b/payload_generator/deflate_utils.cc
index a7a0503..ef8d257 100644
--- a/payload_generator/deflate_utils.cc
+++ b/payload_generator/deflate_utils.cc
@@ -273,8 +273,9 @@
       TEST_AND_RETURN_FALSE(
           CopyExtentsToFile(part.path, file.extents, path.value(), kBlockSize));
       // Test if it is actually a Squashfs file.
-      auto sqfs =
-          SquashfsFilesystem::CreateFromFile(path.value(), extract_deflates);
+      auto sqfs = SquashfsFilesystem::CreateFromFile(path.value(),
+                                                     extract_deflates,
+                                                     /*load_settings=*/false);
       if (sqfs) {
         // It is an squashfs file. Get its files to replace with itself.
         vector<FilesystemInterface::File> files;
diff --git a/payload_generator/payload_generation_config.cc b/payload_generator/payload_generation_config.cc
index 694c71f..c364797 100644
--- a/payload_generator/payload_generation_config.cc
+++ b/payload_generator/payload_generation_config.cc
@@ -32,6 +32,7 @@
 #include "update_engine/payload_generator/ext2_filesystem.h"
 #include "update_engine/payload_generator/mapfile_filesystem.h"
 #include "update_engine/payload_generator/raw_filesystem.h"
+#include "update_engine/payload_generator/squashfs_filesystem.h"
 
 using std::string;
 
@@ -86,6 +87,14 @@
     return true;
   }
 
+  fs_interface = SquashfsFilesystem::CreateFromFile(path,
+                                                    /*extract_deflates=*/true,
+                                                    /*load_settings=*/true);
+  if (fs_interface) {
+    TEST_AND_RETURN_FALSE(fs_interface->GetBlockSize() == kBlockSize);
+    return true;
+  }
+
   // Fall back to a RAW filesystem.
   TEST_AND_RETURN_FALSE(size % kBlockSize == 0);
   fs_interface = RawFilesystem::Create(
diff --git a/payload_generator/squashfs_filesystem.cc b/payload_generator/squashfs_filesystem.cc
index 6c892f5..c423b69 100644
--- a/payload_generator/squashfs_filesystem.cc
+++ b/payload_generator/squashfs_filesystem.cc
@@ -23,6 +23,7 @@
 #include <utility>
 
 #include <base/files/file_util.h>
+#include <base/files/scoped_temp_dir.h>
 #include <base/logging.h>
 #include <base/strings/string_number_conversions.h>
 #include <base/strings/string_split.h>
@@ -36,6 +37,8 @@
 #include "update_engine/payload_generator/extent_utils.h"
 #include "update_engine/update_metadata.pb.h"
 
+using base::FilePath;
+using base::ScopedTempDir;
 using std::string;
 using std::unique_ptr;
 using std::vector;
@@ -49,6 +52,8 @@
 constexpr uint64_t kSquashfsCompressedBit = 1 << 24;
 constexpr uint32_t kSquashfsZlibCompression = 1;
 
+constexpr char kUpdateEngineConf[] = "etc/update_engine.conf";
+
 bool ReadSquashfsHeader(const brillo::Blob blob,
                         SquashfsFilesystem::SquashfsHeader* header) {
   if (blob.size() < kSquashfsSuperBlockSize) {
@@ -88,6 +93,45 @@
   return true;
 }
 
+bool GetUpdateEngineConfig(const std::string& sqfs_path, string* config) {
+  ScopedTempDir unsquash_dir;
+  if (!unsquash_dir.CreateUniqueTempDir()) {
+    PLOG(ERROR) << "Failed to create a temporary directory.";
+    return false;
+  }
+
+  // Run unsquashfs to extract update_engine.conf
+  // -f: To force overriding if the target directory exists.
+  // -d: The directory to unsquash the files.
+  vector<string> cmd = {"unsquashfs",
+                        "-f",
+                        "-d",
+                        unsquash_dir.GetPath().value(),
+                        sqfs_path,
+                        kUpdateEngineConf};
+  int exit_code;
+  if (!Subprocess::SynchronousExec(cmd, &exit_code, nullptr) ||
+      exit_code != 0) {
+    PLOG(ERROR) << "Failed to unsquashfs etc/update_engine.conf: ";
+    return false;
+  }
+
+  auto config_path = unsquash_dir.GetPath().Append(kUpdateEngineConf);
+  string config_content;
+  if (!utils::ReadFile(config_path.value(), &config_content)) {
+    PLOG(ERROR) << "Failed to read " << config_path.value();
+    return false;
+  }
+
+  if (config_content.empty()) {
+    LOG(ERROR) << "update_engine config file was empty!!";
+    return false;
+  }
+
+  *config = std::move(config_content);
+  return true;
+}
+
 }  // namespace
 
 bool SquashfsFilesystem::Init(const string& map,
@@ -239,12 +283,12 @@
 }
 
 unique_ptr<SquashfsFilesystem> SquashfsFilesystem::CreateFromFile(
-    const string& sqfs_path, bool extract_deflates) {
+    const string& sqfs_path, bool extract_deflates, bool load_settings) {
   if (sqfs_path.empty())
     return nullptr;
 
   brillo::StreamPtr sqfs_file =
-      brillo::FileStream::Open(base::FilePath(sqfs_path),
+      brillo::FileStream::Open(FilePath(sqfs_path),
                                brillo::Stream::AccessMode::READ,
                                brillo::FileStream::Disposition::OPEN_EXISTING,
                                nullptr);
@@ -278,6 +322,12 @@
     return nullptr;
   }
 
+  if (load_settings) {
+    if (!GetUpdateEngineConfig(sqfs_path, &sqfs->update_engine_config_)) {
+      return nullptr;
+    }
+  }
+
   return sqfs;
 }
 
@@ -311,9 +361,12 @@
 }
 
 bool SquashfsFilesystem::LoadSettings(brillo::KeyValueStore* store) const {
-  // Settings not supported in squashfs.
-  LOG(ERROR) << "squashfs doesn't support LoadSettings().";
-  return false;
+  if (!store->LoadFromString(update_engine_config_)) {
+    LOG(ERROR) << "Failed to load the settings with config: "
+               << update_engine_config_;
+    return false;
+  }
+  return true;
 }
 
 bool SquashfsFilesystem::IsSquashfsImage(const brillo::Blob& blob) {
diff --git a/payload_generator/squashfs_filesystem.h b/payload_generator/squashfs_filesystem.h
index b79f8c7..5045dfc 100644
--- a/payload_generator/squashfs_filesystem.h
+++ b/payload_generator/squashfs_filesystem.h
@@ -59,7 +59,7 @@
   // |extract_deflates| is true, it will process files to find location of all
   // deflate streams.
   static std::unique_ptr<SquashfsFilesystem> CreateFromFile(
-      const std::string& sqfs_path, bool extract_deflates);
+      const std::string& sqfs_path, bool extract_deflates, bool load_settings);
 
   // Creates the file system from a file map |filemap| which is a multi-line
   // string with each line with the following format:
@@ -113,6 +113,9 @@
   // All the files in the filesystem.
   std::vector<File> files_;
 
+  // The content of /etc/update_engine.conf.
+  std::string update_engine_config_;
+
   DISALLOW_COPY_AND_ASSIGN(SquashfsFilesystem);
 };
 
diff --git a/payload_generator/squashfs_filesystem_unittest.cc b/payload_generator/squashfs_filesystem_unittest.cc
index 29fcf1c..68ca9df 100644
--- a/payload_generator/squashfs_filesystem_unittest.cc
+++ b/payload_generator/squashfs_filesystem_unittest.cc
@@ -112,7 +112,7 @@
 #ifdef __CHROMEOS__
 TEST_F(SquashfsFilesystemTest, EmptyFilesystemTest) {
   unique_ptr<SquashfsFilesystem> fs = SquashfsFilesystem::CreateFromFile(
-      GetBuildArtifactsPath("gen/disk_sqfs_empty.img"), true);
+      GetBuildArtifactsPath("gen/disk_sqfs_empty.img"), true, false);
   CheckSquashfs(fs);
 
   // Even an empty squashfs filesystem is rounded up to 4K.
@@ -133,7 +133,7 @@
 
 TEST_F(SquashfsFilesystemTest, DefaultFilesystemTest) {
   unique_ptr<SquashfsFilesystem> fs = SquashfsFilesystem::CreateFromFile(
-      GetBuildArtifactsPath("gen/disk_sqfs_default.img"), true);
+      GetBuildArtifactsPath("gen/disk_sqfs_default.img"), true, false);
   CheckSquashfs(fs);
 
   vector<FilesystemInterface::File> files;
@@ -148,6 +148,18 @@
   EXPECT_EQ(files[0].name, file.name);
   EXPECT_EQ(files[0].extents, file.extents);
 }
+
+TEST_F(SquashfsFilesystemTest, UpdateEngineConfigTest) {
+  unique_ptr<SquashfsFilesystem> fs = SquashfsFilesystem::CreateFromFile(
+      GetBuildArtifactsPath("gen/disk_sqfs_unittest.img"), true, true);
+  CheckSquashfs(fs);
+
+  brillo::KeyValueStore kvs;
+  EXPECT_TRUE(fs->LoadSettings(&kvs));
+  string minor_version;
+  EXPECT_TRUE(kvs.GetString("PAYLOAD_MINOR_VERSION", &minor_version));
+  EXPECT_EQ(minor_version, "1234");
+}
 #endif  // __CHROMEOS__
 
 TEST_F(SquashfsFilesystemTest, SimpleFileMapTest) {