Looks like you're right - overriding hosts works fine, but forwarding all queries for a particular domain to a specific DNS server doesn't work.
However, m0n0wall starts up Dnsmasq with the proper arguments, so it looks more like a bug in Dnsmasq 2.45.
If anybody wants to investigate: the Dnsmasq option is in the format --server=/example.org/1.2.3.4
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