To get Fiddler 126.96.36.199 to work with Visual Studio Development server and using Ado.Net Rest services, I found only 1 thing that actually works:
1) Add a new host to your \etc\hosts file:
The name is not important, but local works. localhost does not work for some reason with Fiddler.
2) Set Fiddler to filter on host name "local". Just to filter out public traffic on your machine.
3) Change your client library URL to use the new URL. If you have Application settings in the client project, change the ServiceUri. If you use Client Application services, also change those locations in the application Properties / Services tab. Use your service name below.
4) Change your Rest service’s web.config to listen on "local" name. Use Specific Port instead of Auto-assign port in Web tab of application Properties.
<endpoint address="http://local:7777/RestService.svc/" binding="webHttpBinding" bindingConfiguration="higherMessageSize" contract="System.Data.Services.IRequestHandler">
5) Verify service starts and listens on URL from a brower and point to http://local:7777/RestService.svc/ to see the service meta data.
Other solutions on the net such as adding a dot to localhost http://localhost.:7777/Service.svc/ Do not seem to work for me (at least on Vista).
The solution above works from .Net client app and IE.