Did you REBOOT after modifying the HOSTS file? The hosts file is only read by the operating system at the time of the system boot. If you are running a Windows based operating system, changes made without rebooting a machine will not be known by the OS until the machine is rebooted.
In what universe?
This is completely false. Try this: Modify your HOSTS file, add a bogus entry like this:
1.2.3.4 whatever
Then, without rebooting, open a command prompt and try to ping "whatever" - it resolves it from the HOSTS file immediately.
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