Hi,
Yes, it is very much possible to configure router to act as DNS server. you need to define a static host name-to-address mapping in the host name cache of router.
check below URL to get more information.
http://www.cisco.com/en/US/products/ps6350/products_configuration_guide_chapter09186a00804455de.html
Also, if your network have DNS server, it is possible to configure DNS on the router using below command.
Router(config)# ip name-server
check this URL to get more information.
http://www.cisco.com/warp/public/105/reversedns.pdf
hope it helps ... rate if it does ...