Traditional query routing mechanisms for service and resource discovery in distributed systems function purely at the overlay layer by isolating itself from the underlying IP-layer. This leads to large amount of inter-ISP traffic and unbalanced utilization of underlying links which affect the performance of the network. In this paper we address this problem by proposing a novel distributed service discovery algorithm, which enables IP-layer awareness so that query routing is performed without the involvement of the overlay peers. In our algorithm, message level intelligence is exploited using Application Oriented Networking (AON) and thus query forwarding is performed in the IP layer. We also classify services in the registry based on industries so that queries could be forwarded selectively. We present the conceptual design of our framework and analyze its effectiveness through simulation. Our simulation results prove the performance gain obtained by moving down the overlay query routing mechanism to the IP-layer. © 2011 Springer-Verlag.