I have the same problem in out enviroment
Outlook 2007 in cache mode
Exchange 2007
4 domains (1 empty root, 3 domains based on geographical reagions)
In 2 of the 3 domains there are no problems , on owa there is no problem but on one domain the user is able to archive individual items but not entire folders. all workstations have the same image on them so their should not be any differences between the domains.
I have checked that the registery key HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Exchange\Client\Options has the option DumpsterAlwaysOn set to 1
Any ideas?