I believe I am experiencing this issue as well. My configuration is as
follows:

Fresh Jaunty install on my laptop, with wireless interface connected to
internet and wired interface connected to LAN.

Older Jaunty install (upgraded from ?, probably Feisty) on desktop,
wired interface connected to LAN.

Laptop is configured via  network-manager to share wireless internet to
LAN. Both machines can ping each other and connect via SSH, etc. Desktop
machine can reach internet sites by IP. However, Desktop machine will
not resolve DNS names. Attempting to resolve google.com in nslookup
results in the following:

> google.com
Server:         10.42.43.1
Address:        10.42.43.1#53

** server can't find google.com: REFUSED

As in the initial report, I have worked around this for now by manually
editing resolv.conf on the desktop to match the laptop.

As nmap from the desktop shows that port 53 is accessible on the laptop,
I believe this is an issue with my dnsmasq configurating, which I
haven't dove in to yet. It's odd, as this initially worked, and I
haven't changed any configuration. It may have stopped working after
post-installation updates on the laptop, I'm not certain about the
timing.

I will examine my logs and dnsmasq config and report any additional
weirdness.

-- 
NetworkManager Internet Connection Sharing fails to route DNS
https://bugs.launchpad.net/bugs/389006
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