It sounds like your environment is not setup properly for Kerberos authentication to take place. There are many things that can cause Kerberos authentication failure. E.g. Clock skew on the server or client, missing SPN on the web server, etc.
Normally, when you configure to use Windows authentication, you are asking to use SPNEGO, which means using Kerberos whenever possible and then fall back to NTLM if Kerberos fails. However, this post pointed out that this is no longer true. IE7 stops at Kerberos in certain cases but not falling back to NTLM.
You can try to disable the "Enable Integrated Windows Authentication" as the post suggested. It looks odd but it actually just turns off the SPNEGO, you will still use the NTLM.
I guess Firefox and Chrome works because they are using NTLM but not Kerberos. From my experience, non-Microsoft browser doesn't do Kerberos out-of-box. You need to do some configuration work to make it happens. For example, in FireFox, you need to set the network.negotiate-auth.trusted-uris parameter. See here
Once you confirm the NTLM for IE7 is still working fine. Then, you can post another question to ask how to fix the Kerberos authentication problem for IIS.