In this scenario I was using MS Exchange 2010 and all my domain users were being prompted to login every time they started Outlook. The web app was working fine, but as long as they used Outlook, they would be prompted to login and type in the domain name before their username. It turned out to be an autodiscover problem in IIS. This is how I fixed it...
- Open Internet Information Services (IIS) Manager
- Browse to Autodiscover (mine was under Default Web Site but that depends on how Exchange and web pieces were installed)
- Go to Authentication in the IIS section on the middle pane
- Right click on Basic Authentication and click Edit
- Fill in Default Domain with your local domain name and hit Ok
- Repeat for Microsoft-Server-ActiveSync and or OWA folders also if you need
This is useful for single domain Active Directory forests otherwise you have to enter the domain all the time which for end users can be tricky depending on what Active Directory DNS domain you used to install it.
This was solved thanks to a Spiceworks conversation and this TechNet conversation as well.