For reasons unknown, Windows 7 Remote Desktop Connection prevents connections to localhost, as a result you cannot tunnel to the RDP machine directly. (ie. 3389:remotesystem:3389) Trying to use hostnames and point to 127.0.0.1 doesn't work either - the system recognizes that it is connected to localhost and gives an error. (This was removed on XP with Service Pack 2, but then brought back)
I use openssh or cygwin's ssh to connect, using this:
But if you are using putty, here are some helper images:
and then Remote Desktop window:
and you are done.