If you use a loopback address (127.0.0.1) or hosts files on your Windows Server to reference a local IIS web application with Windows Authentication it will probably fail with a 401 error due to a new security constraint. This is often the case if you use a public url for your Sharepoint of TFS server. To resolve this you need to add a registry key…

1. Open regedit
2. Open the key HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\Lsa
3. Create a new DWORD under Lsa named DisableLoopbackCheck
4. Set its value to 1
5. Restart the server for good measure

Related Links

http://support.microsoft.com/kb/896861

http://ppalakollu.blogspot.com/2009/04/ie-8-ntlm-authentication-on-windows.html