Webdav, WS2008 R2 Web edition and IIS 7.5

I can see this is rapidly becoming a FAQ.

Something is preventing me from accessing a shared folder via Webdav. Here are the steps taken so far:

0. Hosted machine has two IP addresses, 2 sub-domain names bound separately to each.
1. Add HTTPS binding to site using appcmd
2. Use netsh to bind SSL certificate.
3. Ensure 443 is open in the firewall
4. Installed desktop experience on server
5. Enabled webdav for site
6. Added virtual directory that maps to intended Webdav folder
7. Added Webdav authoring rule that gives read/write/modify access to me
8. Set webdav folder security properties give full control

I can access the root site and get verified HTTPS connection in Firefox. I cannot access the webdav folder from the server itself using net use * https://sub.domain.com/foldername. I get prompted for a username and password but the request fails with a 'system error 5', access is denied.

If I try and access using a browser I get an HTTP error 401.2 'invalid authentication headers'

If I try and access from a Windows 7 client I get the same access denied message.

Nothing unusual I can see in the server eventviewer, IIS logs are, umm, meaningless :)

This is driving me nuts. Any help welcomed.