Unable to start debugging on the web server. An authentication error occured while communicating with the web server

Quote From: http://provenit.blogspot.com/2008/02/unable-to-start-debugging-on-web-server.html

1. In the “Internet Options” control panel, go to the Security tab. Add “http://localhost” to your list of “Trusted Sites”
2. Again, for “Trusted Sites”, clilck the “Custom Level…” button. Change the value of User Authentication to “Automatic login with current username and password”.
3. In the new IIS manager, ensure that the web application directory is both:
a. in the “Classic .NET AppPool”.
b. has “Windows Authentication” enabled in the Authentication section.