Should be the opposite, host file usage should work as it would on a standard Unix platform so just edit the file and try and ping the host, (note that if you can't get to an address you added through Firefox then take that offline and online again to flush it's IP cache ... other applications may have similar issues).
On earlier versions you may have had to tell lookupd to use a host file using the niutil command but that shouldn't be needed now.
In fact I've just checked by adding a host to /etc/hosts on my Leopard install and, apart from having to remember to use sudo when editing the file, it worked exactly as expected and the host was immediately resolvable (and this is an internal host which is definitely not in DNS).