I ran into a really annoying scenario that took me a while to figure out (figure out = scour the net until I found the answer). I was getting this error because I was using the loopback address (127.0.0.1) in my hosts file for a website, where the name didn’t match the machine name. Microsoft implemented some security around this in IE8, which was blocking me from using my test SharePoint site.
Anyway, I found the answer here: http://www.21apps.com/sharepoint/ie8-beta-2-ntlm-4011-not-good-for-sharepoint-developers/ . They did a longer explanation of the issue, with one way to remedy it.
The comments on the blog pointed to a Microsoft support article, with instructions on how to disable the security feature all together. I opted to disable it since this is a dev VPC for me. The Microsoft support article is here: http://support.microsoft.com/kb/896861