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

SYMPTOMS :
When you use the fully qualified domain name (FQDN) or a custom host header to browse a local Web site that is hosted on a computer that is running Microsoft Internet Information Services (IIS) 5.1 or a later version, you may receive an error message that resembles the following:
HTTP 401.1 – Unauthorized: Logon Failed
This issue occurs when the Web site uses Integrated Authentication and has a name that is mapped to the local loopback address.

Note You only receive this error message if you try to browse the Web site directly on the server. If you browse the Web site from a client computer, the Web site works as expected.
CAUSE :
This issue occurs if you install Microsoft Windows XP Service Pack 2 (SP2) or Microsoft Windows Server 2003 Service Pack 1 (SP1). Windows XP SP2 and Windows Server 2003 SP1 include a loopback check security feature that is designed to help prevent reflection attacks on your computer. Therefore, authentication fails if the FQDN or the custom host header that you use does not match the local computer name.
WORKAROUND :
Method 1: Disable the loopback check
To set the DisableLoopbackCheck registry key yourself, follow these steps:

1. Set the DisableStrictNameChecking registry entry to 1. For more information about how to do this, click the following article number to view the article in the Microsoft Knowledge Base:
281308 (http://support.microsoft.com/kb/281308/ ) Connecting to SMB share on a Windows 2000-based computer or a Windows Server 2003-based computer may not work with an alias name
2. Click Start, click Run, type regedit, and then click OK.
3. In Registry Editor, locate and then click the following registry key:
HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\Lsa
4. Right-click Lsa, point to New, and then click DWORD Value.
5. Type DisableLoopbackCheck, and then press ENTER.
6. Right-click DisableLoopbackCheck, and then click Modify.
7. In the Value data box, type 1, and then click OK.
8. Quit Registry Editor, and then restart your computer.

Method 2: Specify host names
To specify the host names that are mapped to the loopback address and can connect to Web sites on your computer, follow these steps:

1. Set the DisableStrictNameChecking registry entry to 1. For more information about how to do this, click the following article number to view the article in the Microsoft Knowledge Base:
281308 (http://support.microsoft.com/kb/281308/ ) Connecting to SMB share on a Windows 2000-based computer or a Windows Server 2003-based computer may not work with an alias name
2. Click Start, click Run, type regedit, and then click OK.
3. In Registry Editor, locate and then click the following registry key:
HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\Lsa\MSV1_0
4. Right-click MSV1_0, point to New, and then click Multi-String Value.
5. Type BackConnectionHostNames, and then press ENTER.
6. Right-click BackConnectionHostNames, and then click Modify.
7. In the Value data box, type the host name or the host names for the sites that are on the local computer, and then click OK.
8. Quit Registry Editor, and then restart the IISAdmin service.
REFERENCE :
http://support.microsoft.com/kb/896861