It comes up with an error complaining that the telerik dll was not found. However I did a further search and found this:
Which states that if the telerik DLL is in the GAC then the handler needs to be registered like this:
"Telerik.Web.UI.WebResource, Telerik.Web.UI, Version=[ASSEMBLY_VERSION], Culture=neutral, PublicKeyToken=121fae78165ba3d4"
So I made this change:
<add name="Telerik.Web.UI.WebResource" path="Telerik.Web.UI.WebResource.axd" verb="*" type="Telerik.Web.UI.WebResource, Telerik.Web.UI, Version=2012.1.501.35, Culture=neutral, PublicKeyToken=121fae78165ba3d4" />
And now it works. I really think this needs to be documented more comprehensively as it has taken me weeks to figure this out when the only thing I was missing was a version number.