afaik Windows firewall is not able to block loopback communications, can komodo?. I dont want to give up dns caching, and since I dont know of any way to firewall localhost traffic in windows I figured only way would be in dns caching program itself.

So far only way to prevent dns tunneling I can come up with involves giving up dnscache :(. To make up lost performance you could maybe run dnsmasq on the router, or in a virtual machine? or somehow force dnscache to listen on virtual network adapter?