We are having the same issue  with our site, and it's been going on for a
long time. Our site  is using WSS 3.0.
I have suggested to our users  to PDF files as much as possible.
I look forward to any answers given to you.

What I recall is that users  have to add the site  in trusted zone in their IE.

Trusted Sites will work for IE6. In IE7 and 8, you need to put the site
into the Local Intranet zone.

Trusted sites works in IE7 and IE8 also, but you need to change the default
security settings. In IE6 Trusted Sites defaulted to passing credentials.
In IE7 and IE8 it defaults to only doing it in the Local Intranet zone.
Simply go to the Trust Sites zone on the Security Tab in the Internet
Options. Press the Custom button and scroll to the bottom of the list.
Change the setting  from Local Intranet only to pass username  and password.

That may be my "new thing learned" for the day.

I have found this issue  to be reported a lot. What solved the issue in our case
is on the Server, The setting  to disable the communication between Office and
SharePoint needed to be reapplied

So our client did this on this on the server side  and it resolved the issue. I
am not excatly sure where but on the server there seems to be a seeting to
disable/enable coomunucation between office an d Sharepoint.

This is a common  error. Your best bet is to use IE with pass through allowed. It
has to do with how the file is accessed. Your hardware load balancer could also
be causing problems if you have one. I think FF treats the link  differently.
Have you tested under other browsers?

Under IE, make sure the document  is listed as a 'trusted site'. Also, make sure
under IE Security Settings to set "User Authentication" to 'automatic logon with
current user name and password'. This should at the least make things easier for
your users  on your LAN.

I believe this is an authentication issue  with Microsoft Office.My LAN admin
resolved this be changing a MS Office registry entry. I don't know what entry
it is - I'll ask him and respond later.

i am having the same issue  of username  password prompt  i have tried a lot
of things like changing settings in the IE browser internet/intranet Security
but no use can u help us in this issue

There is a lot that causes this popup. If you use a proxy, this might
cause the popup. If you have images/resources on your site  which reside
on a disk, acl's might interfere (permissions on the folder/file). If
authentication on the website is not integrated (which is one of the
easiest solutions) you need to apply that.

I think you'd best search google with the popup message, there are a
lot of blogs about this issue...