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1. On Windows Server 2008 Install "Desktop Experience" Feature. This will install the "Web Client service. Keep it to Automatic and make sure its Started.
2. Use IE 8 32 bit version and browse the SP site and check the explorer view. By Default it will open IE 8 64 bit version which continues to give the error regardless the "Web Client" service being started.

To install Desktop experience see the below link.
http://www.youtube.com/watch?v=cOyRFP6KuEI