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Isolating FTP user with IIS Manager based credentials

I tried to set up user in IIS Manager. When isolation is not in use, the user can log in.

I created virtual directory that points to another location on the disk (with the appropriate permissions applied). The virtual directory has same name as user login. When I select do not isolate, start user in user name directory, everything works fine. The user ends up in /user/ directory on login as it should and user can traverse back to main directory without a problem.

My issue is setting up isolation. When I enable User name directory (disable global virtual directories) I get:

530-User cannot log in, home directory inaccessible.
Win32 error: The system cannot find the path specified.
Error details: File system returned an error.
530 End
Login failed.

When I enable User name physical directory (enable global virtual directories) I get the very same error.

To debug the issue I have removed the virtual directory, created physical directory and same issue happens when isolation is turned on. I did verify FTP Authorization Rules set properly for the user in both the virtual directory and physical directory cases.

When I do not isolate the user, both the virtual and physical directories work properly. The user exists only in IIS Manager, it is not a windows user.

my FTP Authentication settings: Anonymous disabled, Basic disabled, IiiManagerAuth Enabled, FTP Authorization Rules: Allow user Read,Write

Using default App pool under Network service and I have enabled access to all appropriate locations (which is how I got the user to authenticate and work properly when not in isolation mode)

Any ideas on what else to check?

Additional info: Window 2008 Web Edition, latest FTP for IIS 7, IIS Manager installed, allows IIS Manager credentials. Allow SSL connections setting on FTP. Directory browsing UNIX style, display Virtual Directories enabled.

More info:

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