I think the issue might be that there is a confusion between IPv4 and IPv6 on the system, so when you specify localhost, the default IPv6 protocol is chosen. I had the same issue today and it was fixed after localhost reference to IPv6 address in hosts was hashed out, although that might have been a coincidence (I am also setting up SVN). So here is my setup just in case:
- In IIS7 I have "Deliver to SMTP server" option enabled with localhost as my chosen server.
- In IIS6 I have access set to only 127.0.0.1, no authentication for incoming or outgoing.
I fiddled with the settings all day, so, to be honest, not sure what else could have influenced the fact that it's working now. Hope this helps at least a little bit though.