FYI:
The regression was introduced in 2.6.5 with issue3819 .

This also causes problems with Mercurial pushing to google code - see http://mercurial.selenic.com/bts/issue2179 . 

IIRC google code redirects to an url which then in turn requests authentication. I'm not sure how that will work with a retry count of 1. The funny and inconsistent thing is that it apparently would work if they replied 403 instead of 401. "durin42" from google/mercurial knows the details.

(It seems suspicious to me that there are code paths where the retry counter is reset. Doesn't that mean that a remote server will be able to cause endless recursion? Shouldn't there be some kind of hard upper limit on the number of retries?)