We recently configured our Exchange Hybrid setup and were experiencing this error when sending mail from our mailboxes migrated to Exchange Online to the mailboxes still on Premise that had the alias:
@ourdomain.mail.onmicrosoft.com (On Premise Mailboxes had this alias setup in preparation for migrating to Exchange Online).
We use Mimecast for our email filtering. The mail loop was being caused by the mail bouncing back and forth between O365 and Mimecast:
The Exchange Online outbound connector for “Office 365 to On Premise” had our domains FQDN as the routing Smart Host. But it was looking up the MX records for our domain and sending the mail to Mimecast instead of our On Premise server. Mimecast was then looking at the domain and sending it back to Office 365.
In the Exchange Online outbound connector for “Office 365 to On Premise” we changed settings to:
When do you want to use this connector? Only when emails are sent to: Ourdomain, ourdomain.mail.onmicrosoft.com
How do you want to route email messages? Here we entered the external IP of our Exchange On Premise server