Problems downloading docx files seen as zip

For info - Software in use:-
IE7 and IE8 RC1 and Office 2007 installed on Windows XP SP2 clients
IIS 6 on Windows 2003 Server R2
Firefox 3.0.7

I have seen a lot of comment about this problem but no definitive solution
so far, so I (and others) would be extremely grateful if anyone has the big
picture on this one...

I am trying to set up an IIS installation that provides Office 2007 docx
files, however there is an issue when downloading the files. After clicking
on the link to the docx file IE shows a dialogue box offering to open or save
the file, however it sees the file as a "Compressed (zipped) Folder".

Clicking on Open shows a second dialogue box with only the options to Save
or Cancel the download which is now correctly identified as a Microsoft
Office Word Document. More confusingly the lower half of the dialogue box
contains the following text (I've paraphrased a little here):- "File cannot
be opened by the default program. It is either corrupted or has an incorrect
file type".

Trying the same operation in Firefox results in the expected behaviour, i.e.
Word 2007 opens with the document loaded.

The server mime type for docx files is
application/vnd.openxmlformats-officedocument.wordprocessingml.document which
I believe to be the latest/correct value.

The XP clients have the correct file association, i.e. if you double click
on a docx file, Word 2007 opens with the document loaded.

I am aware the docx format is compressed XML, I just don't understand why
IE7 (and IE8 RC1) seems, to my mind, to be mishandling the request that
Firefox manages successfully.

Our internal company standard for the web browser is IE so I don't really
want to have to change to Firefox across the entire organisation and it is
not acceptable for this application to save the document to the desktop and
open it there (which does work BTW) since the end-users will be enquiring on
hundreds of these documents every day.

Many thanks in advance to anyone that can help.