Sure, I can provide more detail.
My problem was that I had changed this setting some time ago and forgot to change it back.
In Win XP
If you right click on My Computer, click "Manage" then double click on "Services and Applications" then "Internet Information Services" then "Web Sites",,,
Rt click "Default Web site" go to properties.
In the "Home Directory" tab, I believe that you should have the path of "C:\Inetpub\wwwroot" which is where the clientaccesspolicy.xml file should normally be found.
After setting this back to C:\Inetpub\wwwroot everything worked as expected.
Hope this helps.