I can't seem to find what config is missing. It use to work this way there might be something change in cygwin. I had similar setup which was always working. I have make sure that firewall on windows is turn off.
[raza@mytest]$ export DISPLAY=:0.0
[raza@mytest]$ xhost +
access control disabled, clients can connect from any host
[raza@mytest]$ export DISPLAY=localhost:0.0
[raza@mytest]$ xhost +
xhost: unable to open display "localhost:0.0"
[raza@mytest]$ xauth list
mytest/unix:0 MIT-MAGIC-COOKIE-1 7ab7e0be4cf96102784fb9c3bb9f0d3b
mytest:0 MIT-MAGIC-COOKIE-1 7ab7e0be4cf96102784fb9c3bb9f0d3b
mytest:0 MIT-MAGIC-COOKIE-1 7ab7e0be4cf96102784fb9c3bb9f0d3b
[raza@mytest]$ telnet localhost 6000
Trying 127.0.0.1...
telnet: Unable to connect to remote host: Connection refused