Credentials Required when Opening Office Files on WSS 3.0
After this issue was identified in a recent Newsgroup post, I checked my installation of WSS 3.0 on SBS 2003 and sure enough I had to enter my authentication credentials three times to open a Word document in a Sharepoint Document Library eventhough Windows Integrated Authentication was employed in a domain environment. Whilst this behaviour can be exhibited if you have basic authentication enabled on your Web Application (see KB871155), this was not the case for me.
It seems this issue is related to KB932118 and Persistent Cookies not being shared between IE7 and Office Applications in Vista. The workaround for Sharepoint is to place your WSS Site in the Intranet Zone and disable protected mode only for the Intranet Zone. This is due to the tighter security employed by IE7.