you would have to enable ""master mode" in Internalz preferences to remove read-only restrictions.
edit: my hosts file at ~530kb when i added my server ip and saved, it locks up just like the OP said. but when I edit my hostname, it saves fine. i'm thinking the file needs to be copied to /internal, edited, and cp -f back to /etc, over writing the original.
edit2: it does the same thing when i try to edit the hosts file in /internal with Internalz. There may be a limitation in the application.
edit3: i used webos quick install. Under Tools.
1. receive file: /etc/hosts to ~/Desktop
2. edited file
3. send file: ~/Desktop/hosts to /etc/