Solution 1:

It seems like disabling pre-loading fixes the issue with iframes and IE so try this :

  $(document).ready(function () {
      /* fancybox handler */
      $('.fancybox-media').fancybox({
          openEffect: 'none',
          closeEffect: 'none',
          autoSize: true,
          type: 'iframe',
          iframe: {
              preload: false // fixes issue with iframe and IE
          }
      });
  });

Tested with fancybox v2.1.4 and IE7.

Check JSFIDDLE