Backdrop: So this error popped up at a client site recently when they were trying to connect their VI client to an ESX host directly. (VirtualCenter was down at the moment). The client was logging in with ESX credentials and everything looked right. We tried SSHing into the box with the same credentials and encountered no problems. Only when trying to connect via the VI client.
Resolution: Turns out after a little bit of head scratching and testing from another VI client that the shortcut icon we were using to launch the VI client had the PassThroughAuth parameter set for Auto SignOn capabilities. It is interesting that even after it fails and we change the credentials and server, it still throws up this error. We had to modify the shortcut to remove the extra parameters to connect directly to the ESX hosts. Crisis averted! :)