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A non-domain user is prompted to login when using the proxy, but the credentials fail
If a non-domain user tries to access the proxy they will be prompted to manually authenticate because they are not part of the domain. This is standard behaviour. The user should be able to log in with a valid Active Directory username and password with Firefox 3.6 and above.
Internet Explorer 6 and above can refuse the credentials if "Integrated Windows Authentication" is enabled. Please disable it by going to Tools->Internet Options->Advanced->Security and un-tick Enable Integrated Windows Authentication. You will need to restart Internet Explorer, after which you will be able to authenticate.