In case anyone is still looking for this, this solved the problem for us:
To whoever this may help, this saved my life...
IIS 7 was difficult for figuring out why i was getting the 401 - Unauthorized: Access is denied due to invalid credentials... until i did this...
- Open IIS and select the website that is causing the 401
- Open the "Authentication" property under the "IIS" header
- Click the "Windows Authentication" item and click "Providers"
- For me the issue was that Negotiate was above NTLM. I assume that there was some kind of handshake going on behind the scenes, but i was never really authenticated. I moved the NTLM to the top most spot, and BAM that fixed it.
Here is the link where this was found.