Let me guess. You were using IP addresses for everything (added ESX servers by IP) originally and now you're following "best practices" and using FQDN...?
The "Error connecting ... lookup failed" is coming from your PC, not VC or the VM.
VMs and actual computers in the lab will work because their DNS config points to the DNS in the lab.
Your desktop/laptop is pointing at corp DNS. Even if you list the lab DNS after all the corp ones, it still won't resolve to the lab unless it can't get to corp.
Put the lab DNS first in the list. If Windows, open Network Connections --> Right-click Your NIC ("Local Area Connection 1" or whatever) --> Properties --> Internet Protocol (TCP/IP) --> Properties --> Advanced --> DNS tab --> Add ...
Enter the DNS server for your lab, if it's not already listed.
Promote the lab DNS to the top of the list using the little green up arrow button. OK, OK, OK.
(Pardon if you already knew. Somebody else reading this later might not.)
Now try it.
Trick is, even if you connect to the VC server using IP, the VI client still tries to resolve the ESX host on which the VM lives using the exact info with which the ESX host was registered in VC. WHen you used IP, VIC used IP. When you registered with FQDN, VIC tries to use FQDN and since your PC wasn't set up to resolve hostnames against the DNS in the lab. Of course, now your PC isn't going to directly check the corp DNS unless it can't get to the lab, but if your lab DNS is configured to pass requests it can't resolve to corp, then you'll still get everywhere else.
At least, that all works for me.
