Nginx – How to get Nginx to pass authentication on to IIS as a reverse proxy

I have the following setup in my Nginx (1.2.6 on Windows 7) conf file:

location ~ ^/FOO/(.*)$ {
    proxy_pass    http://server_two:8888/FOO/$1;
}

On server_two I have IIS7 running a WCF service that uses basic authentication. When I visit http://server_two:8888/FOO/Service.svc?wsdl I get the correct endpoint.

When I visit http://myhost/FOO/Service.svc?wsdl I get a user/pass box that pops up. I can enter my credentials until the cows come home and still nothing. I've also tried the following:

location ~ ^/FOO/(.*)$ {
    proxy_pass    http://server_two:8888/FOO/$1;
    proxy_set_header Host $host;
    proxy_set_header X-Accel-Expires 0;
    proxy_set_header X-Real-IP $remote_addr;
    proxy_set_header X-Forwarded-For $proxy_add_x_forwarded_for;
}

And several other variants, but as yet I'm not able to get the login process to work. Is this possible with Nginx? What am I missing?

UPDATE:

I forgot to mention, IIS is setup to do an HTTP 401 Challenge for Windows Authentication