If you are trying to set the DNS Search order during an OSD task sequence, this will never work if you specify a 127.0.0.1 address. It seems like both WMIC and ConfigMgr fails to use this as a valid address. Please also note that the DNS step has to be configured if you are setting a static IP, it cannot be blank unless you are skipping DNS configuration.
Read the complete post at http://www.1e.com/1EBlogs/post/2009/05/14/Setting-DNS-Search-Order-with-ConfigMgr.aspx