The reason you're getting a 401.2 when using a DNS name is most likely due to the fact register the name you're using as a service principle name (SPN) in AD.
Here's a couple of links that should help you out:
Service Principal Name (SPN) checklist for Kerberos authentication with IIS 7.0/7.5 http://blogs.msdn.com/b/webtopics/archive/2009/01/19/service-principal-name-spn-checklist-for-kerberos-authentication-with-iis-7-0.aspx
Register a Service Principal Name for Kerberos Connections: http://technet.microsoft.com/en-us/library/ms191153.aspx