The files open fine in Firefox and Chrome on the same Win 7 machine and also in IE from a Windows XP box.
As background the reason I noticed this was that I had added a new virtual drive to my moodle server and has robocopied the moodle data across to the new drive (robocopy ensure all the permissions are the same - I have manually checked this). I then tested a load of document links to check that they worked. When I noticed the problem I set the config to point back at the original drive and still got the same problem.
Has anyone come across this? Is this bug?

If it's not a bug then it's a environment issue and I really need some help narrowing this one down as Like I say it's fine with XP
There aren't any clear answers at the forum you suggest, even though it's the original question. Does anyone know an answer? Is it just the way it is or can this be fixed? My campus has been struggling all semester saying Moodle's a pain because of it. I need to win them back and kick this! Thanks for any help...
I had this same problem. I tried the Microsoft article (http://support.microsoft.com/Default.aspx?id=943280) suggested in another post but that did not work.
I then came across this. I use an Apache server and the issue seems to be due to an incorrect reponse from Apache to a PROPFIND request spawned by opening the office doc. I had to add:
<Limit PROPFIND>
Require valid-user
</Limit>
...to stop responses to PROPFIND. I added this to my apache2 conf file under my moodle directory directive.
This solved my problem, I hope it helps others out.
Dean.
Dean
We had the same problem.
I had found the helpdeskslo post in the Office forum but did not know and could not find out how to fix apache....
So thanks; this was really useful.
Julian
Hello again
I've found that since introducing the PROPFIND limit, the error log receives messages like:
configuration error: couldn't perform authentication. AuthType not set!: /moodle/file.php/382
..each time a file is downloaded.
It doesn't seem to hurt anything but fills up the error log.
I've tried to find an answer and failed; I wonder if anyone can point me in the right direction to cure the error, please?
Thanks
I might be bumping an old topic here, but since I ran into this issue as well (in Moodle 1.7, mind, there might be more sophisticated solutions in newer versions) I might as well give a tl;dr summary of my solution here, apologies if (parts of) this entire solution was already present somewhere / stuff is not 100% accurate.
To get rid of the Windows Security popup you need to serve your file with the "Content-Disposition: Attachment" header. This can be achieved by adding ?forcedownload=1 to your file-links, or maybe hack it into the filelib if you are working with an older version of Moodle.
Yes, this will prompt the user what to do with the file (Open/Save/Save As), but at least the Windows Security popup will be gone.
This reply was also given in http://moodle.org/mod/forum/discuss.php?d=143111.