You have enabled Server to Client Content Redirection; you need to disable that again for the local IE to open with URLs.
Check here for details:
Applications that Use or Call IExplore.exe Fail to Open Within an ICA Session
http://support.citrix.com/
Troubleshooting Server to Client Content Redirection
http://support.citrix.com/
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by: MikeHolcombPosted on 2009-10-28 at 10:22:13ID: 25685735
Here's a previous EE posting on using GPO's to configure file extension associations that might help - http://www.experts-exchang e.com/OS/ M icrosoft_O perating_S ystems/Ser ver/Q_2268 8282.html.
Good luck...
Mike