SharePoint web services access give The Request Failed with HTTP Status 401: Unauthorized

Scenario: Consume the SharePoint out of box webservice (People.asmx) to mimic PeoplePicker functionality in ASP.NET website

ASP.NET Environment: Windows Server 2008 with IIS 7.0

MOSS Environment: Windows 2003 SP2 with IIS 6.0

Details: Both ASP.NET and MOSS environments are part of the same domain. ASP.NET web application runs under a service account in IIS which is part of domain

Issue: Trying to access SharePoint web service from asp.net gives an error "The Request Failed with HTTP Status 401: Unauthorized".

Tried running browser under the context of domain user and accessed the people.asmx url. It works fine and WSDL is visible

Tried Impersonation but it made no difference

Tried giving permissions to the domain user on the site collection - didn't work

Solution: Give permissions to the domain user on the web application.

Central Admin -->Application Management --> Application Security -->Policy for webapplication --> Select the web application --> Add User

Add the domain user to the users list and give him required permissions on the web application. That fixed the issue