Checking daemon.log, seems avahi may be causing problems:

$  egrep '(vnet|dnsmasq|virt)' /var/log/daemon.log
Mar  4 18:05:34 foo avahi-daemon[7400]: Joining mDNS multicast group on 
interface vnet0.IPv4 with address 192.168.122.1.
Mar  4 18:05:34 foo avahi-daemon[7400]: New relevant interface vnet0.IPv4 for 
mDNS.
Mar  4 18:05:34 foo avahi-daemon[7400]: Registering new address record for 
192.168.122.1 on vnet0.IPv4.
Mar  4 18:05:34 foo dnsmasq[7513]: started, version 2.40 cachesize 150 
Mar  4 18:05:34 foo dnsmasq[7513]: compile time options: IPv6 GNU-getopt 
no-ISC-leasefile DBus I18N TFTP
Mar  4 18:05:34 foo dnsmasq[7513]: DHCP, IP range 192.168.122.2 -- 
192.168.122.254, lease time 1h
Mar  4 18:05:34 foo dnsmasq[7513]: reading /etc/resolv.conf
Mar  4 18:05:34 foo dnsmasq[7513]: using nameserver 170.215.255.114#53
Mar  4 18:05:34 foo dnsmasq[7513]: using nameserver 66.133.170.2#53
Mar  4 18:05:34 foo dnsmasq[7513]: read /etc/hosts - 8 addresses
Mar  4 18:05:35 foo avahi-daemon[7400]: Joining mDNS multicast group on 
interface vnet0.IPv6 with address fe80::40de:6cff:fe18:56d6.
Mar  4 18:05:35 foo avahi-daemon[7400]: New relevant interface vnet0.IPv6 for 
mDNS.
Mar  4 18:05:35 foo avahi-daemon[7400]: Registering new address record for 
fe80::40de:6cff:fe18:56d6 on vnet0.*.
Mar  4 18:05:36 foo NetworkManager: <info>  vnet0: Device is fully-supported 
using driver '(null)'. 
Mar  4 18:05:36 foo NetworkManager: <info>  Now managing wired Ethernet (802.3) 
device 'vnet0'. 
Mar  4 18:05:36 foo NetworkManager: <info>  Deactivating device vnet0. 
Mar  4 18:05:36 foo avahi-daemon[7400]: Withdrawing address record for 
192.168.122.1 on vnet0.
Mar  4 18:05:36 foo avahi-daemon[7400]: Leaving mDNS multicast group on 
interface vnet0.IPv4 with address 192.168.122.1.
Mar  4 18:05:36 foo avahi-daemon[7400]: Interface vnet0.IPv4 no longer relevant 
for mDNS.
Mar  4 18:05:36 foo avahi-daemon[7400]: Withdrawing address record for 
fe80::40de:6cff:fe18:56d6 on vnet0.
Mar  4 18:05:36 foo avahi-daemon[7400]: Leaving mDNS multicast group on 
interface vnet0.IPv6 with address fe80::40de:6cff:fe18:56d6.
Mar  4 18:05:36 foo avahi-daemon[7400]: Interface vnet0.IPv6 no longer relevant 
for mDNS.

This line in particular:
Mar  4 18:05:36 foo avahi-daemon[7400]: Withdrawing address record for 
fe80::40de:6cff:fe18:56d6 on vnet0.

This makes me wonder if this bug is related to bug #193432

** Summary changed:

- [hardy] libvirt no longer assigns ip to vnet0, which breaks dnsmasq
+ [hardy] libvirt loses ip for vnet0, which breaks dnsmasq

** Description changed:

- Binary package hint: dnsmasq
- 
  dnsmasq no longer works as dhcp server when launched from libvirt on up
  to date hardy.
  
  daemon.log has (repeatedly):
  dnsmasq[7999]: no address range available for DHCP request via vnet0
  
  dnsmasq is running with:
  $ ps auxww | grep [d]nsmasq
  nobody    7999  0.0  0.0  14696  1020 ?        S    15:47   0:00 dnsmasq 
--keep-in-foreground --strict-order --bind-interfaces --pid-file  --conf-file  
--listen-address 192.168.122.1 --except-interface lo 
--dhcp-leasefile=/var/lib/libvirt/dhcp-default.leases --dhcp-range 
192.168.122.2,192.168.122.254
  
  This used to work until a recent update (but I haven't narrowed down the
  package that broke dnsmasq).

-- 
[hardy] libvirt loses ip for vnet0, which breaks dnsmasq
https://bugs.launchpad.net/bugs/198541
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