You are correct. There is some kind of packet filter confusion with the http proxy off. The name resolution works fine with the proxy turned on but times out when the proxy is turned off. However you can go to the console and the resolution is fine which leads me to believe its a packet filter issue.
All the tests were done with http proxy in standard mode. First its turned off and then turned on. Another thing that I have noticed is that nslookup is taking a long time on windows machines, but dig doesn't show any irregularities
I have attached a few screenshots with windows nslookup and windows dig and then finally on the console with dig with the http proxy turned off and then on.