Comment 1 for bug 231060

I suppose the problem is this :

libvirt provides DHCP service on the host virtual interface (vnet0...) so that guest VMs can get an address. dnsmasq, by default, listens to all available interfaces, so that includes vnet0. Obviously they conflict by both trying to provide the same service on the same interface.

Please test one of the following workarounds:
Enable the following line in /etc/dnsmasq.conf (supposing eth0 is the interfaces you want to use dnsmasq on):
interface=eth0

Alternatively, enable this line in /etc/dnsmasq.conf (supposing vnet0 is the interface you don't want dnsmasq to perturb):
except-interface=vnet0

This should allow dnsmasq and libvirt-bin to run side by side.