A post in Avsim's FsX forum showed the way
http://forums1.avsim.net/index.php?showtopic=252685
The folder hierarchy works for Vista but I'm not sure if this applies to XP?
C:\windows\system32\drivers\etc
To elaborate a little, having found the "hosts" file I copied it to desktop and opened it in notepad and added the line "127.0.0.1 localhost" (without speech marks of course) then offered it back up to the "etc" folder and overwrote the original.
Works a treat!
This is how the hosts file should look in notepad after editing:
# Copyright (c) 1993-2006 Microsoft Corp.
#
# This is a sample HOSTS file used by Microsoft TCP/IP for Windows.
#
# This file contains the mappings of IP addresses to host names. Each
# entry should be kept on an individual line. The IP address should
# be placed in the first column followed by the corresponding host name.
# The IP address and the host name should be separated by at least one
# space.
#
# Additionally, comments (such as these) may be inserted on individual
# lines or following the machine name denoted by a '#' symbol.
#
# For example:
#
# 102.54.94.97 rhino.acme.com # source server
# 38.25.63.10 x.acme.com # x client host
::1 localhost
127.0.0.1 localhost