The filters are applied in the order listed. So if you want to block 127.0.0.1, then you would have:
127.0.0.1 DENY
*.*.*.* ALLOW
If you don't have the second line, then everyone gets blocked.
There are 3 IP blocking lists. One for each domain, one for each user, and one for each group. If you just want to ban a user from your server, then you would use the domain list, and I would suggest masking off the last 8 bits. So instead of 127.0.0.1, you should use 127.0.0.*