I just spend two days trying to figure out why I was getting a HTTP status code 405 (method not allowed) IIS 7.5 response when attempting a jQuery based PUT method to update an existing entity. As it turns out I tried it with the internal VS 2010 web server and it was working OK. This helped me to focus my Google searches a bit and I finally narrowed the problem down to having WebDAV Publishing installed on my Windows 7 development virtual machine. I uninstalled WebDAV and the OData data service now works fine.
I found the WebDAV mention in this post… http://social.msdn.microsoft.com/Forums/en/windowsazure/thread/a22b9e60-8353-40c7-af3e-69a8f18240c1