I ran into this issue today on my VPC running BTS2009 on WIN2K8/IIS7:
HTTP Error 401: The requested resource requires user authentication
I found the following blog posting which helped me resolve the issue:
http://sharepointservices.wordpress.com/2009/04/28/http-error-401-the-requested-resource-requires-user-authentication-in-iis7/
Indeed turning off kernel-mode authentication fixed it but I too am concerned with the validity of this fix. For now I am not too concerned because it is a local dev VPC so I will see if the new production servers will have the same issue.
