IIS 7.5 Basic authorization issue

"Added an IIS User" -> Do you mean IIS Manager user?

If so, these aren't real Windows users - just a username and a password in a text file somewhere: they don't have a SID or security tokens, and can't be used for Basic authentication. Not using the out-of-the-box configuration, anyway.

Create a (real) Windows user, and it'll be usable for Basic auth.

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Edit: I just noticed you said something else - Feature Delegation doesn't describe permissions to the site contents, it's whether a non-Administrator can configure those features at a lower level within the site in a web.config file - essentially, which IIS feature icons are usable when they connect to the computer via the Management Service.

The answer is roughly the same, though:

• reset delegation to defaults (you didn't mean to change it; it's dangerous to change some of the delegation settings from defaults under these conditions)
• create a Windows user in Server Manager
• assign permissions to that Windows user either at the file system level, or using the URL Authorization feature

Problem solved. I finally decided to compare the module list side-by-side and there actually was one missing. It turns out that there are two Windows Authentication modules:

On the server, the managed WindowsAuthentication module was there, but not the native WindowsAuthenticationModule highlighted above. Why it was configured that way is anyone's guess, but apparently if the native module is not loaded, the managed module will cheerfully load and silently fail.

So for any future readers who encounter this problem, make sure you have both modules loaded, because IIS will not warn you if one of them is missing.