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VPS DNS broken after dnsmasq install. DNS works fine via VPN...?

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Yesterday I finally successfully installed softether onto my Xen VPS. All was working fine, until I tried to install a new package today. I kept getting 'Temporary failure resolving XXX' errors.
After some digging, I found out that my DNS is not working;
ping google.com
ping: unknown host google.com

Which is strange, because when I use my VPN, I can browse the web without issues. My VPN is set to use dnsmasq;
File excerpt:/etc/dnsmasq.conf
listen-address=127.0.0.1,10.8.0.1
bind-interfaces

As you can see, dnsmasq should also listen on localhost, which I am using as nameserver in /etc/resolv.conf
nameserver 127.0.0.1

So, why does my DNS work over VPN but not on the box itself? What kind of voodoo is this?
Ofcourse I can set to use Google's DNS but that's not what I want. I have dnsmasq running, so why not us eit...

I don't know how I should tackle this problem, please point me in the right direction.
OS = Ubuntu Server 12.04 (boo!, yes I know) on XenPV.
It's pretty much a clean box, just softether.org and dnsmasq are running.

Thanks!


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