My own suggestions:
A) Rename the Hosts file to something different. This should prevent the system from trying to read it at all. For most people, they don't really need a hosts file for things anyway, but a lot of anti-adware programs work by basically redirecting any known ad site to 127.0.0.1. However, it is possible that you have a hosts file for other things. Usually, though, it is more for a business environment not running their own DNS servers.
A bit of background on the Hosts file and DNS for Non-technical users: Think of the hosts file as something like a phone book. Whenever you try to go to a site or browse to another machine, your computer looks to the hosts file first, similar to looking something up in an old fashioned personal notebook. It may be out of date, the numbers may be wrong, but it's right there. The way anti-adware works is similar to the idea of listing every commercial number in your phone book as your home number. Whenever you try to call it, you get yourself (or a busy tone). Same thing for ad sites. 127.0.0.1 is the universal loopback address, effectively a phone number that, no matter where you dial it from will always be the phone you dialed from.
If your computer can't find the server your trying to find in the hosts file, it tries to look at your DNS server. Without getting into the nitty gritty particulars of how the DNS system works, think of this more like dialing information and getting a phone number from them. Generally, their going to be correct, considering that their the ones assigning the numbers out in the first place. Sometimes things may be out of date or out of synch, but usually it all clears up fairly quick (ie. within 24 hours by and large).
By renaming your hosts file, we're effectively hiding the personal phone book from Windows, so it will have to call information for every server it wants to talk to.
As with any metaphor, this isn't perfect, but it suffices for giving an idea of what is going on.
B) Check your Internet Options via the control panel. Even if this is largely an IE configuration tool, most other browsers will look at this for their configuration. Go to the Connections tab and see what is listed. Are there any listings under Dial up and VPN? Then check under LAN Settings. Is anything in their checked? Is there a proxy server specified? If so, please re-post here any particulars of what is listed. It's possible that you are set to use a software proxy on your own machine or something that may be interfering.
