I've already mentioned that WebDAV is broken in Windows Vista. When the Vista user interface asks you to enter a user name and password for a WebDAV resource it inevitably prepends the hostname to the entered username and tries to log on with that one.

The workaround is to use the command line to map a network drive to your WebDAV folder as follows:

C:\>net use * http://dav.myserver.com/
Enter the user name for 'dav.myserver.com': martin
Enter the password for dav.myserver.com: ****
Drive W: is now connected to http://dav.myserver.com/.
 
The command completed successfully.

The network drive can be disconnected via GUI or via command line as follows:

C:\>net use /delete W:
W: was deleted successfully.

Don't forget to check the output of "net use /?" for inspiration as to what else you can do. :-)

Update (2009-01-18):

I decided WebDAV is too useful to give it up just yet, so I found another workaround on the server side (Apache in my case). Even with Vista SP1 stubbornly keeps prepending the hostname to the entered username, which may show up in your server logs like this:

[error] Digest: user 'dav.myserver.com\\martin' in realm 'dav.myserver.com WebDAV' not found: /

Adding a user called dav.myserver.com\\martin, as the log suggest, didn't cut it in my case but adding one called dav.myserver.com\martin (note the single backslash) did. I am now able to use Vista's Add Network location wizard to access my WebDAV location.