Mysql resolving 127.0.0.1 to hostname

I'm trying to connect to mysql using the command

mysql -h 127.0.0.1

It comes up with the error

ERROR 1045 (28000): Access denied for user 'root'@'mydomain.com' (using password: NO)

Why is 127.0.0.1 being converted into my domain name, and how can I fix it?

However, it does work if I don't specify a host (and by extension, if 'localhost' is specified).

Edit: It seems it resolves to the domain name when using TCP, so it also fails when using

mysql -h localhost --protocol=TCP

Edit2: When I use skip-name-resolve I get a similar output except mydomain.com is replaced with x.x.x.x which is the public IP of mydomain.com.

Solution 1:

I had masquerading for all external packets (including on lo). Removing/editing the iptable -t nat POSTROUTING rules fixed the issue.