If I put moodle in a level below below a pretty standard (authtype basic) htaccess protected directory when entering the moodle subdirectory strangly it asks me for the htaccess username/password again, seems Moodle does something to the session that breaks it, it is partly working because if you click cancel the password about 7 times it just enters the subdirectory anyway and runs moodle though some graphics are missing from moodle.
(if I put a new test subdirectory at the same level, i.e something else with no moodle, htaccess allows entry into the subdirectory unchallenged and fine as it should, therefore my server seems ok it seems just something moodle is causing)
as a workaround I put a second .htaccess file in the moodle subdirectory and used a different htpasswd/username/password to get in there.
is annoying but works fine.
found the symptom happens on all browser types xp + windows 7
spent about 12 hours trying to figure this so hopefully this helps someone
Alice Springs, Australia.