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Apache looks first in the directory in which an asset lives, then up each directory level, for .htaccess files. Several .htaccess files can reference the same password file but you need to think through the user experience if you do this, or indeed the alternative of two different files. Access to folder2 would, in the latter case, cause the authentication popup for folder2 to be presented, followed if not already done in session by authentication for higher level - you'll have some confused and irritated visitors.
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