No the .local has no conflicts, DNS is DNS, the problem is "not found" is set in nsswitch.conf before "dns"
WRONG!
/etc/nsswitch.conf : hosts: files mdns4_minimal [NOTFOUND=return] dns
that [NOTFOUND...] is what was happening with any FQDN using localdomain.local or whatever you had.
Justs move the "dns" resolution type after files, where it should be, same as an ubuntu server LTS.
I don't even know why you need [NOTFOUND..] if not using other types of resolution, I can't say for sure that the NOTFOUND directive isn't also in some other Linix distros but I can say "dns" is never after it like it was here, I think it's bug.
This fixes it and no restarting of anything is required.
RIGHT or more RIGHT than before
/etc/nsswitch.conf : hosts: files dns mdns4_minimal [NOTFOUND=return]
And this is how a fresh install of ubuntu server looks, latest LTS version.
/etc/nsswitch.conf : hosts: files dns
Some people think nsswitch.conf is a file of the past, it just typically need know modification but it's still as critical as it's always been.
FYI, I don't know about you but on my install I didn't select or choose any non-standard or extra resolution or authentication types such as Kerberos, AD, NIS, LDAP, etc, really it was just the default install of Ubuntu Desktop LTS.