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intranet site throwing windows security prompt and eventually "Unauthorized: Access .." error

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Hello Everyone,

I have an intranet ASP.NET web app that uses windows authentication which works fine in win 2003 server. I am setting the same site on a windows 2012 server and i encountered the below issue:

When  accessing the site from the webserver (using IIS manager browse functionality) I was prompted for windows credentials repeatedly. After entering credentials, I am not authenticated and i get a error stating  i have no permissions to view the directory or page. " 401.2 Unauthorized: Login failed due to server configuration. Verify that you have permissions to view this directory or page....".  IE was running with enhanced security configuration OFF  and the 'Automatic logon only in Intranet zone' was selected. Also for Domain i turned off firewall.

Additional information which may be useful:

- Anonymous authentication is disabled for my app and Windows Authentication enabled.

-The app is running on ASP.NET v4

-The app is running with Identity = Network Service

-Network Service has Full Control file permissions to the app folder.

-In IIS > Authentication > Windows Authentication > Providers the list was Negotiate first then NTLM. 

-Relevant sections of my web.config are as follows: 

<authorization><denyusers="*"/></authorization>

<authentication
mode="Windows"/>

Any suggestions will be greatly appreciated.

Thanks, Siva

Update:

- Disabled loopback check but issue still persists

-logged in as Admin


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