The Telnet service uses NTLM authentication, by default.
If you are using Kerberos as the default authentication method in your environment, Telnet clients can't access domain resources, unless you configure the Telnet Server service to not require NTLM.
You can use the NTLM registry value described in tip 2756 to disable NTLM or you can open a CMD prompt and type tlntadmn.exe. After pressing Enter:
Select option 3,Display / change registry settings.
Select option 7, NTLM.
Change the data value from 2 to 0 to disable NTLM.