You may have run into this error while trying to develop a site that uses Integrated Windows Authentication on Windows Server 2008 R2 with IIS7.5.  I sure did, and I beat my head against the wall for a couple of hours trying to figure it out.

It turns out to be a security mechanism built into Windows, and the workaround is simple.  Just choose one of the two methods listed in this Microsoft KB article:

You can find a more detailed explanation here:

Hope this saves you some time.

(h/t to this question/answer: IE 8 Authentication Denied on local SharePoint Site)