SFTP as a folder on Vista

NetDrive is free for home use and fulfills all your requirements. See its review in lifehacker.
Features:

• Mounts remote storage as a local hard disk on your PC
• Data transfer by drag and drop files in windows explorer
• Able to run files (video, audio and any other .exe files)
• Mounts drive automatically when Windows starts.
• Operating System : Windows 2000, XP, Vista, 7, 2003/2008 (32/64bit)

Open Source alternative:

win-sshfs is a new open-source project that mounts SSHFS/SFTP as a network drive :

SSH(SFTP) filesystem made using Dokan and SSH.NET library. It allows you to mount remote computers via SFTP protocol like windows network drives.

Commercial alternatives:

For example, WebDrive ($59.95), reviewed here:

WebDrive integrates FTP, WebDAV, SFTP or FrontPage servers into the Windows desktop by making your web server appear as a network drive.

Another option is ExpanDrive ($39.95) :

With ExpanDrive, you can securely access any remote file server directly from Explorer, or even the command line. No need to open a separate SFTP client just for file transfer. ExpanDrive extends the way all applications on your PC can access data.

JFYI: we have made SFTP Net Drive free application available. It lets you mount the remote SFTP folder as a local disk with a drive letter.

ExpanDrive will let you do this. It has a 30-day trial, but requires a purchase ($39.95) after the 30 days.