We have a site that suddenly started asking for authentication when using the "Open With Explorer" item.
We created a dummy site along side it, and added some items to the sp list and this function works fine. It's only not working for this site that's under development.
I've searched the internet and found all of the default stuff to look at, like webclient service running on the local machines, trusted zone in IE, etc. This seems to be a problem on the SP side. Since this functionality works in the test site on the same server, it's got to have something to do with this site.
The behavior is, it prompts you for credentials but won't accept them even if they are valid. If you hit cancel you then see the message "You client does not support opening this list with Windows Explorer".
I don't think that is a valid response though since the login is failing.