127.0.0.1 should be used as least as possible. If I connect to your machine as a server, and it (your server) sends me to 127.0.0.1 or 'localhost', my machine will see it as a localhost request to itself. 'localhost' means 'my own machine' (127.0.0.1).
Look through my recent posts and you might find a better answer to this, as it has come up a few times within the last few days.
You can use localhost(127.0.0.1) for your database and probably should, as the MySql installs to 'soft' security for localhost (or 127.0.0.1).
If you noticed, you can't log in to your MySql database from the LAN as root (on 127.0.0.1) for the same reason. 127.0.0.1 is intended for a bit of security to you PC.
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