Sorry. We broke your OneNote.
In mid December Office 2007 SP1 was released on Microsoft Update. It contains lots of good improvements and a few for OneNote. However, it turns out we also broke something with one of the fixes. You can't create notebooks on a Windows file share that is also running WebDAV. This is what we call a "regression" (when in fixing something you break something else). We feel very bad about this and we're working hard to address it.
Please leave a comment below if you have hit this problem. We'd like to get a sense of how common this is and any affected configurations beyond the ones we know. Prevalence affects how urgently we can get a fix through the pipe. And please mention anything you know about your server (what the server OS is, whether it's also running SharePoint or some other web server etc.).
Here are the details and a work around.
To work around this follow these steps.