Reporting Services :: Request Failed With HTTP Status 401 - Unauthorized (ReportViewer Control)

We are using SharePoint 2010 integrated with Reporting Services 2008 R2. We have successfully configured RS and we are able to create RDL reports using Report Builder from the SharePoint site.

However we are getting following error message when we host same RDL report using Report Viewer control in an application page i.e. ASPX page:

<ERROR>The request failed with HTTP status 401: Unauthorized</ERROR>

We can fix this issue by setting:

1) setting impersonation to false in web.config file:

<identity impersonate="false" />

2) Setting Report server URL to _vti_bin path:

rptViewer.ServerReport.ReportServerUrl = new Uri("http://sharepointserver:1000/_vti_bin/reportserver");

If we turn impersonation to true we get the same error. Other project module requires impersonation to be enabled. Hence we cannot proceed further with this work around/fix.