I’ve been having issues with a few ASP.Net websites that we’re moving to IIS7 at work.  It didn’t happen to app of them, but to some it would prompt for network credentials, then throw an HTTP 401.1 “Access Denied Due To Invalid Credentials” error.  We’d hunt around for solutions and never find anything that worked.  Finally I tripped over the answer this morning:

Open the website in IIS, and under the IIS header double-click on Authentication to open.  Click and select Windows Authentication, then click “Providers” on the right under Actions.  Make sure NTLM is above Negotiate and click OK.

Problem solved!  Hope this helps someone!