Did you try following Binyamin's pointer and insert a comma between "SMTP" and 
"EMAILHOST="?  

ie.  //SENDMAIL EXEC SASMSTR, 
     // OPTIONS='EMAILSYS=SMTP,EMAILHOST=xxx.xxx.xxx.xxx' 

Without the comma, the EMAILHOST operand will be a comment.  Without it, 
it's possible that SASMSTR will default to the local host.  If there's no SMTP 
server (port 25) active on the local host, SAS is probably trying to format a 
message but passing "LOCALHOST" instead of "127.0.0.1" to the address 
conversion routine.  

 
> Date: Thu, 18 Nov 2010 03:21:52 -0600
> From: [email protected]
> Subject: Re: - SMTP :- ERROR: inet_addr failed, cannot convert address 
> 'LOCALHOST'
> To: [email protected]
> 
> Before I talk to SAS thought to cross post here..
> 
> I am exploiting mailing service using SAS however on particular lpar only 
> it seems to be not working ..below is my JCL.
> 
> //SENDMAIL EXEC SASMSTR, 
> // OPTIONS='EMAILSYS=SMTP EMAILHOST=xxx.xxx.xxx.xxx' 
> //SYSIN DD * 
> Filename emp email 
> From='[email protected]' 
> To='[email protected]' 
> Subject='TEST' 
> Attach ='xxxxx.TEMPFTP.TEXT'; 
> Data _Null_ ; 
> File emp; 
> put ; 
> run; 
> 
> I have checked the SMTP Mailer address in SMTP Config
> EZA5348I IP Mailer Address : xxx.xxx.xxx.xxx ==same as used 
> in job.
> 
> I get below error :- 
> 
> ERROR: Unable to connect to SMTP server. 
> ERROR: Unable to connect to SMTP server. 
> ERROR: Unable to connect to SMTP server. 
> ERROR: inet_addr failed, cannot convert address 'LOCALHOST'. 
> ERROR: inet_addr failed, cannot convert address 'LOCALHOST'. 
> ERROR: inet_addr failed, cannot convert address 'LOCALHOST'. 
> 
> 
> Now not able to crack it down to find why it's not able to resolve the SMTP 
> mailing server address...
> 
> One of the diagnostic step I took was to start the packet trace on address 
> = xxx.xxx.xxx.xxx and port 25(smtp) however seems my job when ran could not 
> even hit this hence nothing was captured in the Packet tracing...
> 
> Does anyone has any kind of thought or ideas to crack it down ...Thanks
                                          
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