The lease file on my core also contains 127.0.0.1, but I have no problems.
My LinuxMCE core is running a DNS server (bind), which was installed by LinuxMCE by default; it allows me to use a hostnames like dcerouter in my browser to access the webadmin.
So the 127.0.0.1 in your lease file is probably not coming from your ISP, and it should not be the root cause of your problems.
Are you sure the clients on your internal network also have 127.0.0.1 as their DNS server? In my setup they have 192.168.80.1, i.e. the core as their DNS resolver. (My MDs have static configurations and have 192.168.80.1 in their /etc/resolv.conf, and "ipconfig /all" on my windows machine also shows 192.168.80.1 as the DNS server.)
If your MDs and other machines have 127.0.0.1, then there is something truly messed up with your (DHCP server) config on your core.
If they have 192.168.80.1 then there is likely a problem with bind on your core; check if it is installed and running.
I think the latter case is more likely.
Having said that, if you want to prevent the 127.0.0.1 from appearing in the leases file, you could try removing the "prepend domain-name-servers 127.0.0.1;" from your /etc/dhcp3/dhclient.conf file. Note: I have not tested this, and I don't know what other problems this might cause.