Have you checked these links? Please post back with the result.
a.. You receive an "HTTP Error 401.1 - Unauthorized: Access is denied ...
Explains that you may receive an error message when you try to access
a Web site that is configured to use Integrated Windows authentication only.
support.microsoft.com/kb/871179 - Similar pages
a.. FIX: "HTTP error 401.1 - Unauthorized: Access is denied due to ...
When you use Basic authentication to connect to a Web site that is
hosted by Internet Information Services (IIS), you may be prompted multiple
times for a ...
Bob Lin, MS-MVP, MCSE & CNE
Networking, Internet, Routing, VPN Troubleshooting on
How to Setup Windows, Network, VPN & Remote Access on
"Larry S." <LarryS@discussions.microsoft.com> wrote in message
> I've been trying to use ISS, and discovered that when I try to browse to
> localhost, or try to browse my wwwroot sites from inside IIS, I get the
> message below. I also found that Dreamweaver isn't able to access the
> websites inside the wwwroot directory. Any suggestions on what to do
> be appreciated. I have already tried deleting IIS, rebooting, and then
> reinstalling it, but nothing changed. Thanks for your help.
> HTTP Error 401.1 - Unauthorized
> Description: You do not have permission to view this directory or page
> the credentials that you supplied.
> Error Code: 0x8007052e
> Notification: AuthenticateRequest
> Module: AnonymousAuthenticationModule
> Requested URL: http://127.0.0.1:80/
> Physical Path: C:\inetpub\wwwroot
> Logon User: Not yet determined
> Logon Method: Not yet determined
> Larry S