The problem is that your proxy is not configured to allow the CONNECT method which FlashFXP requires. You will need to contact your isp and ask them to enable support. The CONNECT method provides a lot more control over the GET / POST methods and is required to FXP.
You might want to read these threads too
http://forum.flashfxp.com/showthread...&threadid=2158
http://forum.flashfxp.com/showthread...=&threadid=304
http://forum.flashfxp.com/showthread...=&threadid=123