It seems that whenever I try to require HTTP authentication for a folder
(i.e. through .htaccess), the URL rewrite rules cause page requests to
that directory to be redirected to WP, where I then get a 404 error.
I'm no mod_rewrite expert, so I don't really know what's causing it. I'm
hosted at site5 and don't think I have access to the Apache logs, so I
can't tell what's going on there. There was a support thread at
http://wordpress.org/support/topic/55033 of people having similar
problems with DreamHost. I created a trac ticket - #2397.
Hope this all helps, and let me know if I can provide any other information.