Nginx location matching everything ending with favicon.ico

Nginx locates the path to the file by concatenating the value of root with the value of the URI, so in your example, the URI /foo/favicon.ico will be searched for at /u/static/foo/favicon.ico.

Use try_files to force Nginx to look for a single static file. For example:

location ~* /favicon\.ico$ {
    root /u/static;
    try_files /favicon.ico =404;
}

The try_files statement requires at least two parameters, but the =404 will never be reached. See this document for details.