Apache can be notoriously tricky on this one. A shot in the dark, but it may be related to the relevant feature (AuthConfig in this case) simply not being allowed on the server. Are you seeing something like:
"Client denied by server configuration" in the error logs?
You could try putting somewhere appropriate in your httpd.conf file (the configuration file for Apache) near the bottom (above the virtual hosts) something like:
controls what Apache allows in .htaccess files. It may well be that something earlier in the config file is disabling the use of the AuthConfig functions directive.
Remember - the error log is your friend!
I have to say - I wasn't completely clear on what your problem was from your description, but there's chance this might help.
Maybe you could post an appropriate extract from your server's error log that shows what error you're getting.