According to man 5 resolver:

"On a normally configured system, this file [/etc/resolv.conf] should 
not be necessary.  The only name server to be queried will be on the 
local machine, the domain name is determined from the host name, and 
the domain search path is con-structed from the domain name."

However, squid does not play this way and one must manually add the 
following to squid.conf:

dns_nameservers 127.0.0.1

To prevent squid from failing thusly:

2004/03/06 12:15:52| /etc/resolv.conf: (2) No such file or directory
FATAL: Could not find any nameservers.
       Please check your /etc/resolv.conf file
       or use the 'dns_nameservers' option in squid.conf.
Squid Cache (Version 2.5.STABLE3): Terminated abnormally.