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I am working on a .docx file and check it out, use local drafts folder then discard checkout from the ribbon.

This causes this error "The system cannot find the file specified. (Exception from HREULT: 0x80070002)" however it is working fine if I select the document and discard checkout from the drop down menu.

I have tested with IE 7 and IE 8 with full control permission also added the main site is in trusted sites.

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Have you tried updating SharePoint with the recent cumulative update released on October 2011? I hope this was a buggy situation in SharePoint ribbon control posted in earlier msdn forum posts- http://social.msdn.microsoft.com/Forums/en-NZ/sharepoint2010general/thread/669d5842-1bbb-4a34-ad90-5d9d222569af.

Do not forget to run the configuration wizard after you have completed the cumulative updates.

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