This is answered in the sendmail FAQ as follows:-
* I'm getting "Local configuration error" messages, such as:
553 relay.domain.net config error: mail loops back to myself
554 <user@domain.net>... Local configuration error
How can I solve this problem?
You have asked mail to the domain (e.g., domain.net) to be
forwarded to a specific host (in this case, relay.domain.net)
by using an MX record, but the relay machine doesn't recognize
itself as domain.net. Add domain.net to /etc/sendmail.cw
(if you are using FEATURE(use_cw_file)) or add "Cw domain.net"
to /etc/sendmail.cf.
The current version of the sendmail FAQ is no longer maintained with the sendmail release. It is however regularly posted to comp.mail.sendmail, comp.mail.misc, comp.mail.smail, comp.answers, and news.answers. You can also receive a copy via email by sending a message to mail-server@rtfm.mit.edu with the command "send usenet/news.answers/mail/sendmail-faq" as the body of the message.