Access credentials are not being loaded when use Atlas functionality

Facing this bizzare issue of access denied when use Atlas funcationality. I am using UpdatePanel in two .ascx controls that searches a list(list is on one .ascx and search button is on the 2nd .ascx).Everything works fine(i.e performs search in an Atlas way - no whol page refresh) but it generates an error on the browser that says..

A run time error has occured..

Line: 86762781

Error: Object expected.

When i see the log file at c:/windows/system32/Logfiles/ W3SVC1.. i see

That request is using 127.0.0.1 as the credentials instead of my own credential string.

This is the case if i use Atlas UpdatePanel otherwise it works fine.

Any clue in this regards, do i have to do something in terms of security to get it working?

Copied this Microsoft.Web.Atlas.dll over to my machine and issue went away.