It seems certain -- extremely common -- file types, such as Microsoft Vista, Word, and Google Desktop reveal the DFS partition.
From Jackson's story:
The researchers were able to get around DFS in versions 5.0 and below of TrueCrypt's encryption-on-the-fly tool, and will present their findings on the hack at the Usenix HotSec '08 summit next week in San Jose, Calif.
However, the developers of the open source TrueCrypt say the latest version isn't vulnerable, but highly regarded cryptographer Schneier ain't buying that claim, and contends DFS is easier to hack than encryption:
TrueCrypt's developers, meanwhile, say the just-released new version of the software, 6.0, remedies the leakage problem with DFS. "To our best knowledge, TrueCrypt 6 solves all the issues," says David, one of TrueCrypt's developers. The new features include the ability to create and run a hidden encrypted operating system, for example.
Schneier, however, isn't convinced that TrueCrypt 6 can't be hacked. The version had not yet been released when he and the UW researchers did their work, but Schneier thinks the outcome would likely be basically the same. "The new version will definitely close some of the leakages, but it's unlikely that it closed all of them," he says. Schneier, who has studied the viability of the so-called "deniable" file system model in the past, says DFS is actually easier to hack than encryption, and that there may be no way to make files truly undetectable on a drive. "Deniability is a much harder security feature to enable than secrecy," he says. (See Schneier On Schneier and Schneier: In Touch With Security's Sensitive Side.)
Now, proving that a file exists does, in fact, break DFS -- but that's not the same as recovering the encrypted file. The researchers say that only some of the file's contents can be recovered when encrypted in DFS.
My takeway: ignore the DFS feature and use TrueCrypt's full disk encryption. That's always been safer than only encrypting files and folders.
The full paper is available here.