The error "Login failed for user 'NT AUTHORITY\IUSR'" in ASP.NET and SQL Server 2008

The trick here is that NT AUTHORITY\NETWORK SERVICE actually appears to the database as DOMAINNAME\MACHINENAME$ (note the $ sign!). That is, when you cross the machine boundary from your web server to the SQL Server, SQL Server sees the machine account if you use the NETWORK SERVICE or LOCAL SYSTEM accounts. If you use any other non-domain account, SQL Server will not receive your credentials.

I'm a bit puzzled by your error message. Truth be told, I don't think that when the DB is on another box, you'll see anything other than Login Failed for NT AUTHORITY\ANONYMOUS LOGON.

IUSR is used for anonymous websites, and can't pass over the wire to SQL Server. You may find a way for it to work if you're doing everything on the same machine, but I'd never know because I'd never do it that way... ;-)

In case it helps someone, in web.config I added <identity impersonate="false" /> for this error to go away (under <system.web>)

I would suggest to create a separate (preferably domain) account and specify it in the connection string (usually in web.config) Then you can limit permissions on the web server what this account can and cannot do. Then you can grant this account required permissions in SQL server.