I have the same trouble. Pipex, my provider has been having trouble with FTP and I thought it was down to that. Now I have read your post, that may not be the case. In IE6 I could log on just as you describe, with username and password.
I was recommended by Snec on this forum to try Core FTP Lite, it is very good and may help you. It is also free!
It does look like we have discovered a problem with IE7. Maybe it is to do with the security settings but I have yet to find a way to get over this.