I have this nagging feeling that I have been down this road before, so I need to blog it so maybe, just maybe, I won't waste another hour troubleshooting something I've done before.
You browse to Central Admin, or any Site Collection really, and you are prompted incessantly for your user credentials. After about 5-8 times, the page comes up. You are NOT presented with a Forbidden message.
You check your IIS log files, and you see several 401 errors for WebResource.axd.
You remember something about installing SP2 when IIS wasn't on the box, then installing IIS from a source that did not have the Service Pack slipstreamed. Hmmm. Might be relevant.
Explained thoroughly by Paul Culmsee on his blog www.cleverworkarounds.com, http://www.cleverworkarounds.com/2007/11/15/darn-iis-and-service-packs/. If it wasn't foreshadowed by the last sentence of the Scenario, reinstalling Windows Server 2003 SP2 was the solution.