I have created web services which is hosted in SharePoint (ISAPI folder). The reason for this is because I need to query SP lists and return data from those lists. My web service is called from client application (not browser). Everything works great until IISRESET is executed on the server (which is done everyday). After that, web service cannot be called again, it breaks with following error:

"The server was unable to process the request due to an internal error"

Logs show 401 unauthorized.

User that is calling web services has contributor permissions on SP site.

But, if I login in SharePoint with that user, then everything works again.

So, to sum up, my web service works when I am logged-in in SP and stops working when IISRESET (or server restart) is performed. This sounds like IIS cannot authenticate my user. What could be the problem. Anonymous is not allowed and I am using NTLM.