In a recent sharepoint project, I implemented an authentication webpart which should replace the NTLM authentication dialog box. It works fine as long as the user provides v
Mark's comment is correct; The NTLM auth prompt is triggered by a 401 response code and the presence of NTLM as the first mechanism offered in the WWW-Authenticate header (Ref: The NTLM Authentication Protocol).
I'm not sure if I understand the question description correctly, but I think you are trying to wrap the NTLM authentication for SharePoint, which means you don't have control over the server-side authentication protocol, correct? If you're not able to manipulate the server side to avoid sending a 401 response on failed credentials, then you will not be able to avoid this problem, because it's part of the (client-side) spec:
If the UA supports HTTP Authentication [RFC2617] it SHOULD consider requests originating from this object to be part of the protection space that includes the accessed URIs and send Authorization headers and handle 401 Unauthorised requests appropriately. if authentication fails, UAs should prompt the users for credentials.
So the spec actually calls for the browser to prompt the user accordingly if any 401 response is received in an XMLHttpRequest, just as if the user had accessed the URL directly. As far as I can tell the only way to really avoid this would be for you to have control over the server side and cause 401 Unauthorized responses to be avoided, as Mark mentioned.
One last thought is that you may be able to get around this using a proxy, such a separate server side script on another webserver. That script then takes a user and pass parameter and checks the authentication, so that the user's browser isn't what's making the original HTTP request and therefore isn't receiving the 401 response that's causing the prompt. If you do it this way you can find out from your "proxy" script if it failed, and if so then prompt the user again until it succeeds. On a successful authentication event, you can simply fetch the HTTP request as you are now, since everything works if the credentials are correctly specified.