I know the problem..But I can't remember how I fixed it.
Here's my sendmail.mc file from a loose server, not relay loose. Hope it came out ok in the cut/paste. your DNS server should be fine on the same machine. I have this one server running http,mail (pop,IMAP) router and DNS RH8.0 sendmail sendmail-8.12.8-5.80. This is the file from that server. Check to make sure you don't have redundant DNS in hosts file and in BIND, shouldn't matter but you might want to check it. I took some things out of this file and added some things, I did compile and try it though and it worked fine. Might be the aliases. Make sure the virtualusertable point to a valid user on the system not a list. Put the list wrapper in the /etc/aliases file and then point an email address to that like "admin: :include:/etc/mail/alias/admin" then put "jimmy@mydomain.com admin" I'm not sure if you can put an email add in the sendmail.mc file itself. Some more to try anyway
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divert(-1)dnl
include(`/usr/share/sendmail-cf/m4/cf.m4')dnl
VERSIONID(`setup for Red Hat Linux')dnl
OSTYPE(`linux')dnl
define(`LUSER_RELAY',`local:admin')dnl
define(`confDEF_USER_ID',``8:12'')dnl
define(`confTRUSTED_USER', `smmsp')dnl
define(`confTO_CONNECT', `1m')dnl
define(`confTRY_NULL_MX_LIST',true)dnl
define(`confDONT_PROBE_INTERFACES',true)dnl
define(`PROCMAIL_MAILER_PATH',`/usr/bin/procmail')dnl
define(`ALIAS_FILE', `/etc/aliases')dnl
define(`UUCP_MAILER_MAX', `2000000')dnl
define(`confUSERDB_SPEC', `/etc/mail/userdb.db')dnl
define(`confPRIVACY_FLAGS', `authwarnings,novrfy,noexpn,restrictqrun')dnl
define(`confAUTH_OPTIONS', `A')dnl
MD5 CRAM-MD5 LOGIN PLAIN')dnl
(`confSERVER_CERT',`/usr/share/ssl/certs/sendmail.pem')
(`confSERVER_KEY',`/usr/share/ssl/certs/sendmail.pem')
define(`confTO_IDENT', `0')dnl
FEATURE(`no_default_msa',`dnl')dnl
FEATURE(`smrsh',`/usr/sbin/smrsh')dnl
FEATURE(`mailertable',`hash -o /etc/mail/mailertable.db')dnl
FEATURE(`virtusertable',`hash -o /etc/mail/virtusertable.db')dnl
FEATURE(redirect)dnl
FEATURE(always_add_domain)dnl
FEATURE(use_cw_file)dnl
FEATURE(use_ct_file)dnl
FEATURE(local_procmail,`',`procmail -t -Y -a $h -d $u')dnl
FEATURE(`access_db',`hash -T<TMPF> -o /etc/mail/access.db')
FEATURE(`blacklist_recipients')dnl
EXPOSED_USER(`root')dnl
LOCAL_DOMAIN(`localhost.localdomain')dnl
MASQUERADE_DOMAIN(mydomain.com)dnl
MAILER(smtp)dnl
MAILER(procmail)dnl
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