Almost every implementations support lookback interface.The function of loopback interface is to allow the client and server on the same host to communicate using TCP/IP. every system assigns class A 127.0.0.1 address for the loopback interface and its name as local host.
It should be remembered that if ip datagram sent to its own host's ip address as destination address, it will be given to lookback interface thus not allowing the datagram to put on to the wire.It just loopbacks to the ipinput queue.
It's nothing but its a type of echo request and echo reply ICMP message to verify the working condition of ur NIC and to check that TCP/IP works properly or not.
For practical approach download the ethernal protocol analyser s/w and select the options menu to capture the icmp packets on ur LAN. U will come to know that no icmp packet will be captured for that command i.e ping 127.0.0.1 becuase those packets will on be put on to the wire (i.e on the network or outside the NIC)
NOTE: this(protocol analyser) works only if u r on the network .