you certain its a .ico ?? because when i try to save it using Mozilla Firefox it states its a Jpeg actually
favicon.ico.jpg
what did you create the icon with ? it looks as if it was done with paint or photoshop rather than a specific icon editor
also your code is wrong
<LINK REL="SHORTCUT ICON" HREF="/favicon.ico" />
Open up index.html, and add this line after any meta tags in the HEAD section but before the </head>.
<link REL="SHORTCUT ICON" HREF="http://yoursitedotcom.here/favicon.ico">
If you are in a user directory, without a domain, add something like this instead:
<link REL="SHORTCUT ICON" HREF="http://yoursitedotcom.here/yourdir/favicon.ico">