In commit f3868259 we began adding the options

  --domain-needed
  --local=/$mydomain/

to all dnsmasq commandlines with the stated reason of preventing
forwarding of DNS queries for names that weren't fully qualified
domain names ("FQDN", i.e. a name that included some "."s and a domain
name). This was later changed to

  domain-needed
  local=/$mydomain/

when we moved the options from the dnsmasq commandline to a conf file.

The original patch on the list, and discussion about it, is here:

  https://www.redhat.com/archives/libvir-list/2012-August/msg01594.html

When a domain name isn't specified (mydomain == ""), the addition of
"domain-needed local=//" will prevent forwarding of domain-less
requests to the virtualization host's DNS resolver, but if a domain
*is* specified, the addition of "local=/domain/" will prevent
forwarding of any requests for *qualified* names within that domain
that aren't resolvable by libvirt's dnsmasq itself.

An example of the problems this causes - let's say a network is
defined with:

   <domain name='example.com'/>
   <dhcp>
      ..
      <host mac='52:54:00:11:22:33' ip='1.2.3.4' name='myguest'/>
   </dhcp>

This results in "local=/example.com/" being added to the dnsmasq options.

If a guest requests "myguest" or "myguest.example.com", that will be
resolved by dnsmasq. If the guest asks for "www.example.com", dnsmasq
will not know the answer, but instead of forwarding it to the host, it
will return NOT FOUND to the guest. In most cases that isn't the
behavior an admin is looking for.

A later patch (commit 4f595ba6) attempted to remedy this by adding a
"forwardPlainNames" attribute to the <dns> element. The idea was that
if forwardPlainNames='yes' (default is 'no'), we would allow
unresolved names to be forwarded. However, that patch was botched, in
that it only removed the "domain-needed" option when
forwardPlainNames='yes', and left the "local=/mydomain/".

Really we should have been just including the option "--domain-needed
--local=//" (note the lack of domain name) regardless of the
configured domain of the network, so that requests for names without a
domain would be treated as "local to dnsmasq" and not forwarded, but
all others (including those in the network's configured domain) would
be forwarded. We also shouldn't include *either* of those options if
forwardPlainNames='yes'. This patch makes those corrections.

This patch doesn't remedy the fact that default behavior was changed
by the addition of this feature. That will be handled in a subsequent
patch.