to me, what i get is that i get asked to login twice.
once for the folder, once again for the first file.
i face no other problem. I tried both an account with password and one without. Tried both a file on the root and a protected folder.
If you still get the problem you may consider a step-by-step guide for ALL, so that we get to the same point.
I'm using for my testings an HTC Desire, ROM Leedroid 2.3 and the stock browser, that's the HTC one for what i can see (no wonder since the ROM is Sense-based).
sure usability can be improved, but this relates uniquely to the template. I think i will work on it, sometime.