I have the same error when I try to branch from an http server with digest authentication, and no proxy.

$ bzr branch -v http://<email address hidden>/tst1/tst2/tst3
bzr: ERROR: pycurl.error: (65, "necessary data rewind wasn't possible")

Traceback (most recent call last):
  File "/usr/lib/python2.5/site-packages/bzrlib/commands.py", line 846, in run_bzr_catch_errors
    return run_bzr(argv)
  File "/usr/lib/python2.5/site-packages/bzrlib/commands.py", line 797, in run_bzr
    ret = run(*run_argv)
  File "/usr/lib/python2.5/site-packages/bzrlib/commands.py", line 499, in run_argv_aliases
    return self.run(**all_cmd_args)
  File "/usr/lib/python2.5/site-packages/bzrlib/builtins.py", line 916, in run
    from_location)
  File "/usr/lib/python2.5/site-packages/bzrlib/bzrdir.py", line 789, in open_tree_or_branch
    bzrdir = klass.open(location)
  File "/usr/lib/python2.5/site-packages/bzrlib/bzrdir.py", line 667, in open
    return BzrDir.open_from_transport(t, _unsupported=_unsupported)
  File "/usr/lib/python2.5/site-packages/bzrlib/bzrdir.py", line 704, in open_from_transport
    redirected)
  File "/usr/lib/python2.5/site-packages/bzrlib/lazy_import.py", line 125, in __call__
    return obj(*args, **kwargs)
  File "/usr/lib/python2.5/site-packages/bzrlib/transport/__init__.py", line 1616, in do_catching_redirections
    return action(transport)
  File "/usr/lib/python2.5/site-packages/bzrlib/bzrdir.py", line 681, in find_format
    transport, _server_formats=_server_formats)
  File "/usr/lib/python2.5/site-packages/bzrlib/bzrdir.py", line 1440, in find_format
    return format.probe_transport(transport)
  File "/usr/lib/python2.5/site-packages/bzrlib/bzrdir.py", line 2398, in probe_transport
    server_version = medium.protocol_version()
  File "/usr/lib/python2.5/site-packages/bzrlib/smart/medium.py", line 421, in protocol_version
    self._protocol_version = client_protocol.query_version()
  File "/usr/lib/python2.5/site-packages/bzrlib/smart/protocol.py", line 620, in query_version
    self.call('hello')
  File "/usr/lib/python2.5/site-packages/bzrlib/smart/protocol.py", line 488, in call
    self._request.finished_writing()
  File "/usr/lib/python2.5/site-packages/bzrlib/smart/medium.py", line 348, in finished_writing
    self._finished_writing()
  File "/usr/lib/python2.5/site-packages/bzrlib/transport/http/__init__.py", line 539, in _finished_writing
    data = self._medium.send_http_smart_request(self._buffer)
  File "/usr/lib/python2.5/site-packages/bzrlib/transport/http/__init__.py", line 518, in send_http_smart_request
    code, body_filelike = self._post(bytes)
  File "/usr/lib/python2.5/site-packages/bzrlib/transport/http/_pycurl.py", line 268, in _post
    self._curl_perform(curl, header, ['Expect: '])
  File "/usr/lib/python2.5/site-packages/bzrlib/transport/http/_pycurl.py", line 325, in _curl_perform
    curl.perform()
error: (65, "necessary data rewind wasn't possible")

bzr 1.5 on python 2.5.2 (linux2)
arguments: ['/usr/bin/bzr', 'branch', '-v', 'http://<email address hidden>/tst1/tst2/tst3']
encoding: 'ISO-8859-1', fsenc: 'ISO-8859-1', lang: 'en_US'
plugins:
  bzrtools             /usr/lib/python2.5/site-packages/bzrlib/plugins/bzrtools [1.5.0]
  launchpad            /usr/lib/python2.5/site-packages/bzrlib/plugins/launchpad [unknown]
  rebase               /usr/lib/python2.5/site-packages/bzrlib/plugins/rebase [0.3.0]
  svn                  /usr/lib/python2.5/site-packages/bzrlib/plugins/svn [0.4.10]
  upload               /usr/lib/python2.5/site-packages/bzrlib/plugins/upload [0.1.0]
*** Bazaar has encountered an internal error.
    Please report a bug at https://bugs.launchpad.net/bzr/+filebug
    including this traceback, and a description of what you
    were doing when the error occurred.