I don't think that it's DNS as much as the Touch's reliance on mysqueezebox.com for items on its menus and for 'Apps' and internet radio. It _should_ work with local music, although it may appear a little crippled. Try rebooting the Touch using the reset button on the back. If it's connected to the local server you should be able to get into 'My Musc' and be good from there.
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