I am having the same issue - Onenote 2007 and WebDAV.
The only relevant information I could find is that Windows XP sends unauthenticated requests even when the client is authenticated. The only solution to this was enabling unauthenticated OPTIONS and PROPFIND requests on the server - but Dreamhost support said that I don't have access to change these options, and that they only support basic WebDAV functionality...
I don't know how else to get to the options besides the web panel, and they're not there. I'll keep poking around, but any more help would be much appreciated.