>I did some more testing and found that it is specific to the TCP/IP connection protocol. Named Pipes works fine so that is a quick solution for some of my customers.
>
>It seems to completely shut down TCP/IP SQL connections.
>So much so that I cannot even get it to connect to a SQL Server instance on the SAME workstation using 127.0.0.1,PortNumber (if I start from a network share). The same 127.0.0.1,PortNumber work fine when run form a local drive. So the problem is definitely with Windows 7 (e.g. workstation) and not with the SQL Server since it looks like the connection attempt is not even leaving the workstation. Which is supported by the logs on the SQL Server not showing a login attempt.

Does it help if you turn off the firewall?