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I want to use LoadVars to hit a URL which uses HTTP digest authentication. I tried using the http://username:password@host syntax, but get an error like "I/O Error: Server returned HTTP response code: 401 for URL".

I'm guessing this just isn't supported?

Correct, it's not supported.
If you need to password protect the data, you could use a dynamic page that requires a login/password passed via GET/POST method.