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We have a Forefront TMG proxy at work. When I configure some command line tools with the proxy address, I often include my credentials using username:password@proxy-address but it never works.

I suspect that this only works for Basic Authentication but the TMG proxy doesn't have this setup, I have seen the headers in the challenge response.

Does TMG support Basic Auth and will it use AD credentials or will it use some kind of internal list of users?

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Yes.

This dialog box warns you about the dangers of enabling Basic authentication on a protected network. If you confirm that you want to use this method by clicking Yes, you will notice that in the Authentication Servers section in the Authentication dialog box that is shown in the figure below, the Select Domain button will be enabled. This is because when the client application sends credentials, the TMG firewall uses the default domain for Basic authentication.

-- http://www.isaserver.org/articles-tutorials/configuration-security/Authenticating-Outbound-Web-Traffic-TMG-Firewall-Protected-Networks.html

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