Error message when you open a Web site by using Basic authentication in Sharepoint Designer error pop up "The folder name is not valid"

When you open a Sharepoint Web site by using Basic authentication in Microsoft Sharepoint designer or Microsoft Expression Web on a computer that is running Windows Vista, you may receive the following error message.

"The folder name is not valid"

Check this http://support.microsoft.com/kb/928692

This KB would definitely help.
If "BasicAuthLevel" is already there then check value and change to "2".

Thanks,
Nilesh