Does it work well if "enable anonymous access" is clicked in IIS? As a first step, make sure you can access the website without having to input username and password.
BTW, I wonder if you'd mind provide more details about the IIS log file output with errors and full error code?
Please refer to the following status code in IIS log for more information.
401 - Access denied. IIS defines a number of different 401 errors that indicate a more specific cause of the error.
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401.1 - Logon failed. |
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401.2 - Logon failed due to server configuration. |
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401.3 - Unauthorized due to ACL on resource. |
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401.4 - Authorization failed by filter. |
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401.5 - Authorization failed by ISAPI/CGI application. |
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401.7 – Access denied by URL authorization policy on the Web server. This error code is specific to IIS 6.0. |