IIS 7.5 Basic authorization issue

When I log on using correct user name\password (I always copy-paste them) I get 401.1 error. User name and password are correct (user is created on server locally, not a domain one). I can run program as this user (runas /noprofile /user:tmp notepad.exe). Basic authorization's default domain is a server name, realm is empty.

I've saved FailedReqLogFile. AUTH_BASIC_LOGON_FAILED shows

ErrorCode="Logon failure: unknown user name or bad password. (0x8007052e)"

and MODULE_SET_RESPONSE_ERROR_STATUS shows

ModuleName="BasicAuthenticationModule", Notification="AUTHENTICATE_REQUEST", HttpStatus="401", HttpReason="Unauthorized", HttpSubStatus="1", ErrorCode="Logon failure: unknown user name or bad password. (0x8007052e)", ConfigExceptionInfo=""

And one more thing - if I use my domain login\password it woks! Basic Authentications is only enabled authentication in application...

Could you please suggest me how I can troubleshoot and fix this issue? Maybe somebody hit it before...

Best regards,
Alex

UPDATE: I get 401.1 when I trying to access site from local host. I can actually access files from remote host.

You receive error 401.1 when you browse a Web site that uses Integrated Authentication and is hosted on IIS 5.1 or a later version http://support.microsoft.com/kb/896861

Use BackConnectionHostNames or DisableLoopBackCheck.