IIS Security Enhancement in Windows Server 2003 SP1
Ever wonder why Integrated Windows Authentication (IWA) does not work or stops working for custom host header enabled sites after installing Windows Server 2003 Service Pack 1?
You have ensured that you did include the site URL in the Local Intranet site list in your browser configuration and yet it still doesn't work!!!
Keep receiving HTTP error 401.1 even if you typed in the correct user name and password when prompted?
IWA will not be successful on custom host header enabled sites due to the loopback check security feature of Windows Server 2003 SP 1. Worry not! Check out this must-to-read Knowledge Base article for more details. http://support.microsoft.com/kb/896861.
Remember one thing before you try the trick. Back up your registry 
.