Comment 21 for bug 959037

You need to restart network-manager after changing the configuration value.

It's unfortunate that the configuration needs to be changed, but it's needed. I sympathize with your use case, but there is sufficient benefit in using NM together with dnsmasq and resolvconf to solve other DNS resolution issues to inconvenience those who use dnsmasq separately as a standalone daemon (to have to change the config to suit their needs).

We won't be fixing this for Precise, but I've started discussion with dnsmasq upstream to possibly deal differently with the binding and allow running instances on other IP addresses (such as 127.0.1.1 or so). It's still going to need sufficient amounts of work to fix dnsmasq's method of binding to interfaces and how NM starts and interfaces with dnsmasq (though I already have patches for NM, but they're useless without the fixes in dnsmasq). At this point though, the simplest way to deal with this remains to edit interfaces= to map to the relevant external interfaces (eth0, wlan0, etc.) and let the NM-spawned instance get started on lo.