A friend of mine provided the answer via email....
The purpose of the hosts file is to serve as a local supplement to a dns lookup (on linux, you can actually specify whether it asks DNS or the file first). As such, it is only used to return IP addresses. You need to use this in combination with Apache VirtualHosts to make apache respond to a host using a specific directory.
So... you hosts file should look like
Find your apache configuration directory. Under XAMPP this is c:\xampp\apache\conf (yours might be ‘conf.d’)
In conf you’ll have a folder called ‘extra’ and it that a file called ‘http-vhosts.conf’. Open that file.
Make sure that the following line is uncommented
You’ll need a default entry, and then any specific ones for each hostname you want to use.
The default one...
CustomLog "logs/localhost-access.log" combined
The custom ones should look like this, replace ‘airbase.local’ with ‘local.wys’ and the value of document root to where you want it to start serving files from.
CustomLog "logs/airbase-access.log" combined
Restart apache and it should all be working nicely!
The hosts file is used by the system and can't be used to restrict access for specific apps.
See I'm trying to block game "X" from accessing the internet including updating for alternative software which is able to block specific apps from accessing specific sites.