This is a known issue with Microsoft based web servers. The reason for the user name and password dialogue box pop up is that when you try to download a document that has an office extension (doc, xls, ppt and so on) IE will try to open it on your computer using Word or Excel and so on. Since Word has the function to edit documents on a web server, it is asking for a user name and password. If you put the right user name and password, it will open Word inside your IE browser. If you hit Cancel, it will download the file.
Solution: Make your office documents as a Zip or a Self extracting EXE.