If I have a Windows service with a config file that points to web services it needs to call, is it more secure to put a fake DNS name for the server being connected to, then update the HOSTS file to redirect outbound calls to the right IP address?
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No, basically. Why would it be? If someone can read the DNS name from the config, then they can simply do a Ping or check the hosts file anyway.
Regardless, though, obscuring names and IP addresses is definitely not a way to do security and will simply make maintenance and management difficult for you.

Dan
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Thanks for this. Was just a random thought I had in the shower this morning... – ck. Aug 17 '12 at 12:42