Can confirm this with a fresh install of Hardy Heron 8.04.1:

On a properly set up mysite.local domain everything works, except ubuntu
cannot resolve hostnames in the .local domain.

adjusting /etc/nsswitch.conf as follows solves the problem:
- hosts:          files mdns4_minimal [NOTFOUND=return] dns mdns4
+ hosts:          files dns 

This is on a x64 system with glibc 2.7

-- 
mdns4_minimal switch off home-network
https://bugs.launchpad.net/bugs/140663
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