Hi Kandhla,
Yes, you can absolutely use the next-help-self option with iBGP. In fact, in some circumstances you might HAVE to. For example, let’s say you have a router (R1) with an external BGP relationship with an ISP, and your highly available site has been given two separate circuits from that ISP. To ensure that R1’s BGP neighborship with the ISP is also highly available, you have configured R1 to use the ISP’s router’s loopback address (you would also have to use the ebgp-multihop option for this). To do this you would create static routes on R1 to get to the ISP’s loopback through both of your circuits.
Now, suppose that R1 also has an iBGP relationship with other routers you have inside your company (say, R2 and R3). What would happen to all the routes that R1 would learn from the ISP, when it shares them with R2 and R3? The answer is that the routes would not appear in the routing table, and the reason is the next-hop attribute associated with the routes.
In order for BGP to consider a route valid, the very first thing it checks for is the reachability of the next-hop address. From the perspective of R2 and R3, they have no idea how to get to the loopback of the ISP’s BGP router. The best way to fix this would be to do what you said–turn on the “next-hop-self” option for R1.
--Andrew