Im having the exact same issue. I cant get the sitemap plugin to write to the sitemap.xml or sitemap.xml.gz files. I hesitate in giving out huge permissions like. Although I just tried it for an example and I still got an error. Here is what I did:
Gave Internet User and Internet Process read and write abilities for the 2 files but it appears it still doesnt work.
I much prefer to use Linux but this project is forcing me to work on Windows 🙁
Im bumping this back to the top since this is still an issue. Anyone else who is running IIS PHP5 and WordPress run into this??
-S