In addition to adding "127.0.0.1 localhost" to your hosts file, make the following changes in Eclipse.
Under Window -> Preferences -> Android -> DDMS:
- Set Base local debugger port to "8601"
- Check the box that says "Use ADBHOST" and the value should be "127.0.0.1"
Thanks to Ben Clayton in the comments for leading me to a solution.
Some Google keywords: Ailment or solution for Nexus S Android debugging with the error message: Can't bind to local 8600 for debugger.
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