I found the answer, thanks to Voltagex. This answer is explained under LATEST UPDATE in my initial post. However, I am mentioning it here also.
I found that svc doesn't need anonymous access. I think I was getting an error that seemed to be related to svc but wasn't. I am using the following security for the hosting website in IIS 7.5. SVC access is closely related to the security you have specified for the website hosting your WCF. In my case, I used the following security for the hosting website, where I needed to turn off anonymous access and allow only authenticated users to access the host website file resources like svc files.
<security>
<authentication>
<anonymousAuthentication enabled="false" />
<basicAuthentication enabled="true" />
<windowsAuthentication enabled="true" />
</authentication>
</security>