The microsoft link I gave should clear out any saved passwords which in turn will show the prompt again. The software will show you all the sites that passwords are saved for and allow deletion.
Using these two processes should make sure that all saved passwords have gone, the prompt should then start to appear again.
I'll keep looking for some other solution but if the above does not work and all
your settings are correct I suspect something has been corrupted. The only solution may then be to re-install IE8.
Just found this but not sure it will work with IE8.It is something like this that you need. http://www.dougknox.com/utility/scri...ord_prompt.htm
Have a look here there may be something similar for IE8 http://www.kellys-korner-xp.com/xp_tweaks.htm