Is it possible to redirect a domain name using a local Windows DNS server? For example if a user query www.yahoo.com it should be redirected to an Internal server.
Yes, but it is very bad practise.
To do it you would add a new zone for yahoo.com and then add a www A record.
Consider, users and possibly your servers (including mail if you have internal SMTP using the DNS server) will no longer be able find any other record in the yahoo.com domain. You would need to statically add each if you want them to continue working because they will only be able to lookup what is in your DNS server.
The correct way to redirect DNS requests or web requests if that is your purpose is to use a proxy server. Some do both DNS and HTTP/HTTPS, but most of the time only a web proxy is needed.