Thanks Nathan to share you workaround as well, but IMHO it is "just as
good" as the --no-hosts flag. In that I mean while it prevent the reply
of for the Host it also stops any other entry in Hosts to be
used (which users might want or even already rely on).

Darragh, Jason and Serge tried to find a solution which keeps the wanted
behaviour (all but Host from /etc/hosts) but fixes the issue (Host
itself resolved to to make something suitable for libvirt
upstream submission.

Despite the time passing since then, I didn't see this or a similar
approach to be realized upstream yet.

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  libvirt's dnsmasq setup will read /etc/hosts on the host, resulting in
  odd resolution behaviour on the VM

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