Just going to drop a little more info about this problem as I'm wrestling with it right now. The problem seems to be in the Microsoft Word plist file, and it seems to be a problem that is generated within about 10 minutes after opening a file.
I just opened a Word doc from Sharepoint through Document Connection. Edited it, saved it. No problem. Edited some more, this time keeping it open for longer. When I tried to save, it started asking for passwords again - the usual problem. So the passage of time seems to have something to do with it.
I saved a copy locally, and uploaded to the site through the same Document Connection session. No problem with uploads, but I was not able to open the uploaded document again. I just keep getting the password loop - so the problem is a one-way deal: I can upload a fresh document, but can't open, edit, or save changes to an existing Sharepoint document once the problem starts.
I tossed the Microsoft Word plist file without closing anything. No change.
I closed Microsoft Word (but not Document Connection) and tossed out only the Microsoft Word plist file. Problem resolved. Upon attempting to open and edit a Word document, I was prompted for a password only once (no password loop) and it allowed me to open, edit, and save the document.
Since I can fix the problem temporarily by simply tossing out the plist file, I assume this is a client-side problem rather than a problem on the Sharepoint server, unless there is something that is changing on the server and remaining static in the plist file.
Any thoughts?