Thanks,

Please note that while this setup is not "recommended", it is still a
valid setup.

I've tried the old 2.6.20-15-generic kernel as you suggested and found
it behaves the same: "lo ate my ip address" surprising me and wondering
why didn't I notice this before. So, _it seems this is not a
2.6.20-16-generic related bug_.

I found what the problem seems to be. When ubuntu starts, it has no ip address 
'assigned' to the interface, just the alias eth0:avahi. Example from runlevel 1:
[EMAIL PROTECTED]:~# iptables -t nat -A POSTROUTING -o lo -j MASQUERADE
[EMAIL PROTECTED]:~# ip a
1: lo: <LOOPBACK,UP,10000> mtu 16436 qdisc noqueue
    link/loopback 00:00:00:00:00:00 brd 00:00:00:00:00:00
    inet 127.0.0.1/8 scope host lo
    inet6 ::1/128 scope host
       valid_lft forever preferred_lft forever
2: eth0: <NO-CARRIER,BROADCAST,MULTICAST,UP> mtu 1500 qdisc pfifo_fast qlen 1000
    link/ether 00:11:43:77:2a:1d brd ff:ff:ff:ff:ff:ff
    inet 169.254.3.54/16 brd 169.254.255.255 scope link eth0:avahi
3: eth1: <NO-CARRIER,BROADCAST,MULTICAST,UP> mtu 1500 qdisc pfifo_fast qlen 1000
    link/ether 00:12:f0:3a:2b:c0 brd ff:ff:ff:ff:ff:ff
    inet 169.254.7.13/16 brd 169.254.255.255 scope link eth1:avahi
[EMAIL PROTECTED]:~# ping -c 1 127.0.0.1
PING 127.0.0.1 (127.0.0.1) 56(84) bytes of data.
ping: sendmsg: Operation not permitted

If you add an ip (maybe from dhcp), it works again.

[EMAIL PROTECTED]:~# ip a add 1.2.3.4/32 dev eth0
[EMAIL PROTECTED]:~# ip a
1: lo: <LOOPBACK,UP,10000> mtu 16436 qdisc noqueue
    link/loopback 00:00:00:00:00:00 brd 00:00:00:00:00:00
    inet 127.0.0.1/8 scope host lo
    inet6 ::1/128 scope host
       valid_lft forever preferred_lft forever
2: eth0: <NO-CARRIER,BROADCAST,MULTICAST,UP> mtu 1500 qdisc pfifo_fast qlen 1000
    link/ether 00:11:43:77:2a:1d brd ff:ff:ff:ff:ff:ff
    inet 1.2.3.4/32 scope global eth0
3: eth1: <NO-CARRIER,BROADCAST,MULTICAST,UP> mtu 1500 qdisc pfifo_fast qlen 1000
    link/ether 00:12:f0:3a:2b:c0 brd ff:ff:ff:ff:ff:ff
    inet 169.254.7.13/16 brd 169.254.255.255 scope link eth1:avahi
[EMAIL PROTECTED]:~# !ping
ping -c 1 127.0.0.1
PING 127.0.0.1 (127.0.0.1) 56(84) bytes of data.
64 bytes from 127.0.0.1: icmp_seq=1 ttl=64 time=0.050 ms

--- 127.0.0.1 ping statistics ---
1 packets transmitted, 1 received, 0% packet loss, time 0ms
rtt min/avg/max/mdev = 0.050/0.050/0.050/0.000 ms

I'm compiling/checking with new/old kernels to see if this thing has
been around. I'm kind of sure I've been totally unplugged before and
didn't happened this to me.

Thanks for your time,

-- 
Lattest kernel linux-image-2.6.20-16 broke netfilter MASQUERADE 
https://bugs.launchpad.net/bugs/117303
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