which architecture are you using?
do you use testing repository?
have you tried HTTP_PROXY= environment variable too?

I'm using i686 architecture:
Linux bfg_nb.local.net 2.6.23-ARCH #1 SMP PREEMPT Mon Oct 22 10:58:45 UTC 2007 i686 Genuine Intel(R) CPU T2400 @ 1.83GHz GenuineIntel GNU/Linux

I'm not using testing repository:
core + extra + community + unstable

I've tried both methods: usually i've always used "Use preset proxy environment variables" which was useful using notebook at home and at job. I've tried also "Manually..." but with the same behaviour.

anyway i'm not sure but i think it is a kde bug, some days ago i've read a bug report very similar but unfortunately i dont find this link now. yesterday bugs.kde.org was down for few hours.

if you find a patch please post immediatly, my time is very low atm to do such reasearches

http://bugs.kde.org/show_bug.cgi?id=150954
looks like your issue

exactly the same... i was looking for :)
now i vote this and add my comment...
thankyou

ps
using live cd with beta 3 of kde4
http://home.kde.org/~binner/kde-four-live/
the trouble with proxy does not exist.

hrm could you try that:
run kdeinit in a konsole and then then retry your auth proxy thing,
there should be error logging in the konsoloe with kdeinit

kio_http_debug: WARNING: (12948) Unsupported or invalid authorization type requested
kio_http_debug: WARNING: (12948) Proxy URL: http://proxy.atac.roma.it:80
kio_http_debug: WARNING: (12948) Request Authorization: Kerberos
kio (KIOConnection): ERROR: Header read failed, errno=104
kio (KIOConnection): ERROR: Header has invalid size (-1)

As suggested me, this is the debugging output using a kdelib with --enamble-debus option

kio_http: (15261) GET http://www.archlinux.org/ HTTP/1.1
kio_http: (15261) User-Agent: Mozilla/5.0 (compatible; Konqueror/3.5; Linux) KHTML/3.5.8 (like Gecko)
kio_http: (15261) Accept: text/html, image/jpeg, image/png, text/*, image/*, */*
kio_http: (15261) Accept-Encoding: x-gzip, x-deflate, gzip, deflate
kio_http: (15261) Accept-Charset: iso-8859-15, utf-8;q=0.5, *;q=0.5
kio_http: (15261) Accept-Language: it, en
kio_http: (15261) Host: www.archlinux.org
kio_http: (15261) Connection: close
kdecore (KNetwork resolver): shouldResInit: /etc/resolv.conf updated
kio_http: (15261) ============ Received Response:
kio_http: (15261) "HTTP/1.1 407 Proxy Authentication Required ( The ISA Server requires authorization to fulfill the request. Access to the Web Proxy service is denied. )"
kio_http: (15261) "Via:1.1 PROXY2"
kio_http: (15261) "Proxy-Authenticate: NTLM"
kio_http: (15261) "Proxy-Authenticate: Basic realm="proxy2.atac.roma.it""
kio_http: (15261) "Proxy-Authenticate: Kerberos"
kio_http_debug: WARNING: (15261) Unsupported or invalid authorization type requested
kio_http_debug: WARNING: (15261) Proxy URL: http://proxy2.atac.roma.it:80
kio_http_debug: WARNING: (15261) Request Authorization: Kerberos
kio_http: (15261) "Proxy-Authenticate: Negotiate"
kio_http: (15261) "Connection: close"
kio_http: (15261) "Proxy-Connection: close"
kio_http: (15261) "Pragma: no-cache"
kio_http: (15261) "Cache-Control: no-cache"
kio_http: (15261) "Content-Type: text/html"
kio_http: (15261) "Content-Length: 3773 "
kio_http: (15261) --empty--
kio (kioslave): SlaveBase::checkCachedAuthInfo window = 14680072 url = http://proxy2.atac.roma.it:80
kio (kioslave): SlaveBase::openPassDlg window-id=14680072 progress-id=0
kio (kioslave): SlaveBase::openPassDlg: username=pippo
kio (kioslave): SlaveBase::openPassDlg: password=[hidden]
kio_http: (15261) ============ Sending Header:
kio_http: (15261) GET http://www.archlinux.org/ HTTP/1.1
kio_http: (15261) User-Agent: Mozilla/5.0 (compatible; Konqueror/3.5; Linux) KHTML/3.5.8 (like Gecko)
kio_http: (15261) Accept: text/html, image/jpeg, image/png, text/*, image/*, */*
kio_http: (15261) Accept-Encoding: x-gzip, x-deflate, gzip, deflate
kio_http: (15261) Accept-Charset: iso-8859-15, utf-8;q=0.5, *;q=0.5
kio_http: (15261) Accept-Language: it, en
kio_http: (15261) Host: www.archlinux.org
kio_http: (15261) Proxy-Connection: Keep-Alive
kio_http: (15261) Proxy-Authorization: NTLM TlRMTVNTUAABAAAABQIAAAAAAAAAAAAAAAAAAAAAAAA=
kio_http: (15261) Connection: close
kio_http: (15261) ============ Received Response:
kio_http: (15261) "HTTP/1.1 407 Proxy Authentication Required ( Access is denied. )"
kio_http: (15261) "Via:1.1 PROXY2"
kio_http: (15261) "Proxy-Authenticate: NTLM TlRMTVNTUAACAAAAFAAUADgAAAAFAoECQooBpF5WGLEAAAAAAAAAAHIAcgBMAAAABQCTCAAAAA9SAE0AXwBTAE8ATgBEAFIASQBPAAIAFABSAE0AXwBTAE8ATgBEAFIASQBPAAEADABQAFIATwBYAFkAMgAEABgAYQB0AGEAYwAuAHIAbwBtAGEALgBpAHQAAwAmAHAAcgBvAHgAeQAyAC4AYQB0AGEAYwAuAHIAbwBtAGEALgBpAHQAAAAAAA=="
kio_http: (15261) "Pragma: no-cache"
kio_http: (15261) "Cache-Control: no-cache"
kio_http: (15261) "Content-Type: text/html"
kio_http: (15261) "Content-Length: 0 "
kio_http: (15261) --empty--
kio (KIOJob): error 11 www.archlinux.org

found a workaround installing ntlmaps from aur repository (thank you graziano).
now konqueror proxy authentication works but the problem is bigger than this: i've noticed that is no more possible to open any windows share (with kde file manager) inside the active directory windows domain here at my job.
may be is connected with changes to kerberos?

status on kde 3.5.9?

tested today, but we are still on same blocked situation.
the only way to work is using ntlmaps.

Which is the password for the proxyserver?

What's the status of this issue?

still now, in my experience the status is always the same... using an archlinux
kde-common 3.5.9-2
kdebase 3.5.9-2
kdenetwork 3.5.9-1
...

This bug show similarities and has been voted for quite a lot: http://bugs.kde.org/show_bug.cgi?id=138414
I created comments on both bugs in the KDE bugzilla linking them together (can't actually label one of them as duplicate).

Issue is actually an upstream problem, not limited to one distro.