Finally I got an answer for this well known Issue. Thanks SharePoint Team J
We've received several reports of this issue through our Customer Support Services. Although it would be impractical for us to post every known issue or confirmed bug on this blog, I have a strong feeling that this particular problem is much more widespread than has been reported. If you have experienced this problem and can consistently reproduce it, please leave a comment. While we're still investigating a possible long term fix, here are several workarounds for you to try.
With Office 2007 running on Windows Vista, opening an Office document hosted on a SharePoint (i.e. WSS 3.0 or MOSS 2007) site results in a prompt for login credentials even if the user is already logged on with an account that has access to the document. Canceling the credential prompt may still (but not always) allow the document to open in read-only mode.
Go to IE7 -> Internet Options -> Connections -> LAN Settings.
- Behavior 1: Clearing all checkboxes on this dialog will cause the credential prompt.
- Behavior 2: Automatically detect settings - enabling this option will prevent the prompt if it effectively enables a proxy server and enables bypassing the proxy for local addresses.
- Behavior 3: Use a proxy server - enabling a proxy server in conjunction with enabling "Bypass proxy server for local addresses" will prevent the credential prompt.
When the user does not have a proxy in the environment, it's still possible to work around this issue by setting a "fake proxy" and "blanket bypass" as follows in IE7's LAN Settings dialog.
- Click the Proxy Server checkbox. Set the address to "fake proxy" without the quotes and the port to 80.
- Click the "Bypass proxy server for local addresses" checkbox.
- Click Advanced and put an * in the Exceptions list to cause all addresses (including external ones) to be bypassed.
Source <Lawrence />