Comment 8 for bug 218110

While this may be considered a duplicate of 216990 and even https://bugs.launchpad.net/ubuntu/+bug/222003, I found that I could no longer VNC into a recently upgraded Gutsty to Hardy. I would receive a password prompt, but continue to get authentication errors. It was only after looking at the auth.log and seeing the same messages as yamo that I finally found the problem:

libpam-smbpass was not installed during the upgrade.

Installing libpam-smbpass (sudo apt-get install libpam-smbpass) immediately fixed the problem.