Comment 5 for bug 353446

If an account is set to auto-login - no matter if it's encrypted or not - the behaviour should be that it will autologin. The current behaviour (gdm failure) is not desirable. It would be better to explicitly disable autologin for encrypted homedirs (as suggested by Dustin) or at least for a security warning to show, preventing login (like if home perms aren't set correctly.

I notice this bug is quite old, so apologies if this isn't relevant to the current karmic development.