Possible reasons WINDOWS\system32\drivers\etc\hosts is not working (appart from the obvious)

From what you have done, and the list of things you have checked makes me think some sort of system failure as it looks like you have done the correct things, try doing "SFC /SCANNOW" from the command line just to test for system problems.

"Is this a problem with the hosts file not working or is it a problem with no DNS resolution at all working on the machine (ping, IE, etc.)?

If the latter, does nslookup work?

If so, take a look at When DNS and ping Fail but nslookup Works on my website for the long answer.

Short answer is that after trying all sorts of things, I ended up with ""Winsock XP Fix"" which someone built some years back after noting that the registry entries related to WinSock were actually the same between systems, and that sometimes they end up corrupted."