I wrote in comment #16:
> 3. Consider now case #1 where you add dnsmasq-server (from the
> "dnsmasq" package) into the mix. Dnsmasq-server forwards to
> dnsmasq-NM — this already works. Dnsmasq-libvirt should forward
> to dnsmasq-server. If you have set things up as decribed above
> then this should happen.

On second thought I realize that there is a small problem. If dnsmasq
server is installed on a system as in case #1 then dnsmasq server will
forward to dnsmasq-libvirt, thus creating a loop. In order to prevent
this from happening, dnsmasq-server's resolvconf hook script has to be
modified to exclude the record "lo.dnsmasq-libvirt" (just as it already
excludes its own record "lo.dnsmasq").

Once libvirt is enhanced as we are proposing here (bug #1163147), I will
see to it that the necessary change is made to dnsmasq: I think that the
change should be made via an enhancement to resolvconf that I already
had in mind but I won't go into detail here about that.

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https://bugs.launchpad.net/bugs/1163147

Title:
  Please run dnsmasq in such a way that it can also be used on the host
  — to look up the VMs' names

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