No, the proxy server doesn't do anything to the HOST file. They work differently, you don't even need to edit the HOST file if you have a proxy server setup. What it basicly is, is a firewall that sits between your network and the internet. All computer will have to go through this proxy server to access the internet. You can be on the proxy server and modify it to deny certain website.
The HOST file, was an old fashion way of communicating with computer in the network. You had to manually configure it like for example if Jane computer was at 192.168.2.1 you would put 192.168.2.1 Jane to associate the IP address with the computer name because it was easier to remember the name then the ip address. But this was to much work when the network starts to grow, so we needed other method like DNS,WINS,NetBIOS, and NetBEUI that does it all automaticly for us. The HOST file is still there in Windows, there's really no reason why it's still there, but for every Windows machine to be able to access the internet it will first try to find the IP and Name in the HOST file before it contact WINS or DNS. That is why the HOST file is dangerous also, spywares can redirect you to other site when you request a legit web page. Hacker also take advantages of this to redirect thier victim machine when ever they access the internet. Does this sound more clear or am I just being too technical?