Setup a pots ppp link with on demand dialing, do:
telnet <existing and resolving host>

And you get a:
hostname lookup failure

Response, notice the failure message instead of the "Unknown host" message
given when you try to telnet to an unknown host.

I tried doing "echo 1 > /proc/sys/net/ipv4/ip_dynaddr", before ifupping the
ppp interface as documented, but that doesn't help.

I tried this with:
-a ppp asigned DNS, but there were already other correct and public
available DNS entries in /etc/resolv.conf.
-the correct (normally ppp asigned DNS) in /etc/resolv.conf and PEERDNS
off.

Also see bug 16640 where this was first discussed.