NTLM-authenticaion fails but Basic authentication works - authentication

Question

Here's what happens on the local server when application invokes HTTP request on local IIS.
request.Credentials = CredentialCache.DefaultNetworkCredentials;
request.PreAuthenticate = true;
request.KeepAlive = true;
When I execute the request, I can see the following series of HTTP calls in Fiddler:
Request without authorization header, results in 401 with WWW-Authenticate NTLM+Negotiate
Request with Authorization: Negotiate (Base64 string 1), results in 401 with WWW-Authenticate: Negotiate (Base64 string 2)
Request with Authorization: Negotiate (Base64 string 3), results in 401 with WWW-Authenticate: Negotiate (Base64 string 4)
Request with Authorization: Negotiate (Base64 string 3), results in 401 with WWW-Authenticate NTLM+Negotiate
Apparently the client and the server (both running on the same machine) are trying to handshake, but in the end authorization fails.
What is strange is that if I disable Windows authentication of the site and enable Basic authentication and send user/pwd explicitly, it all works. It also works if I use NTLM authentication and try to access the site from the browser specifying my credentials.

Answer 1

Well, after several hours of struggling I figured what the problem was. In order to be able to inspect network traffic in Fiddler I defined a Fiddler rule:
if (oSession.HostnameIs("MYAPP")) { oSession.host = "127.0.0.1"; }
Then I used "MYAPP" instead of "localhost" in the Web app reference, and Fiddler happily displayed all session information.
But server security was far less happy, so this alias basically broke challenge-response authentication on the local server. Once I replaced the alias with "localhost", it all worked.