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Note, this only happens when the items are dragged across the folder pane on the left hand side, so it can be worked around by taking a circuitous route with the mouse pointer. However, I would like a fix that allows the direct route across the folder pane.

I have seen this on more than one Windows 7 installation, but all the ones I have tried are attached to a domain and haved mapped drives. I do not know if the issue is caused by this or something else. If anyone without a domain and/or mapped drives can confirm whether they have the issue it would be helpful.

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Welcome to Superuser. I have not seen this on my domain with Windows 7. Can you edit your question with some more details like; Does this happen all the time? When dragging local to local? Or is it only when dragging items to/from network locations? – CharlieRB Feb 14 '12 at 15:20
I've seen this kind of behavior, but only with large files. Does it happen with, say, an empty text document? – Shinrai Feb 14 '12 at 16:24

This sounds like a rogue shell extension.

The first thing I would recommend is turning off your shell extensions, using ShellExView.

Then turn them on one at a time.

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