Seems like the bit 7 is Your actual problem. It should be kept high during the data transfer and brought down to reset the internal data pointer (of decoder/mux chip) to point to the first character. So here is the working version for You. I have not the hardware to test it but.....

while(1)
 {		
    unsigned char string1[]="ABCDEFG";
    unsigned char z;
	P0 = 0;		// Clear the  internal address register
    for (z=0;z<=7;z++) {
         P0 = (string1[z] & 0x3F) | 0x80;         // Data to port, bit 6 down
         P0 = (string1[z] & 0x3F) | 0x80 | 0x40;  // Data to port, bit 6 up
         P0 = (string1[z] & 0x3F) | 0x80;         // Data to port, bit 6 down
    }
 }