This problem exists because Microsoft does not correctly implement DAV (MS WebFolders). They have violated the RFC of a protocol that they originally helped draft! I've had the same problem with Apache/mod_dav before and tracked it down to how Windows issues the authentication strings. Really, the only problem is that MS decided that they want to make all authentication to DAV sources in the form of:
DOMAIN\user
Also, MS tends to transform URLs to UNCs (\\server\share), which you can get around..
Out-of-the-box compatibility with Microsoft's buggy "WebFolders" implementation of DAV would be a *huge* thing for Zimbra. Get ready to throw out your SharePoint servers! The only other companies I know that have successfully done this are:
Xythos:
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Online Document Management - Enterprise Content Management - Online File Storage - Secure Document Collaboration - Document Management - Records Management - Document Workflow - Document Imaging
South River Technologies:
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FTP Server, FTP Client, Managed File Transfer, and WebDAV Collaboration Software
There is a reasonably easy way to make apache/mod_dav compatible with XP using another module mod_encoding:
How to setup a Windows XP compatible WebDAV folder under Apache
BTW: There is an existing bug report to do this (24278):
Bug 24278 - WebDav Is Broken