SharePoint :The folder may be located in an unavailable location, protected with a password, or the filename contain illegal characters

You got the following error while trying to access the sharepoint site using SharePoint Designer.

Error : The folder 'http://localhost' isn't accessible. The folder may be located in an unavailable location, protected with a password, or the filename contains a / or \.

Solution:
This can be because of many reasons, lets see

1. There is no such site or folder ?
2. This location is unaccessible because you are using FORM Authentication ? You need to extend the web application on another port to connect to SPD.
3. Url contains illegal characters ?
4. Url contains file names i.e. default.aspx

Got one for from comments :-)

Another thing to check in Central Administration > Application Management > Authentication Providers
Make sure "Enable Client Integration" is set to "Yes".

Fix any of the above issues, close the SPD fully and open again..access the site you should be able to get to it.