Re: Can be done on the router
That does not need "deep packet". It is simply the same type of setup used for split-DNS. Quite often used in company setups to avoid unneeded traffic going outside when not needed since you are in the LAN. In some companies it is used to block well known bad countries, like adding the evil country domani to your local DNS and make it answer with 127.0.0.1. Quite effective.
As for your case: It is evil, but I wouldn't call it "deep inspection", that type of setup is known and used since the beginning of DNS.