I had a similar issue with Vista earlier.
Go into control panel > administrative tools
Click on local security policy, expand local policy on the left pane. Click security options, then in the right pane near the bottom click on network security: LAN manager authentication. From the drop down click Send LM & NTLM - use NTLMv2 session security if negotiated. Click OK. Reboot.
Some versions may not have this local security option under admin tools (Win7 Home maybe, thats how it is with Vista). If yours doesn't try this method instead:
Fire up regedit, then go into HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Contro l\Lsa
Right click LmCompatibilityLevel and choose modify. Set the value to 1 and reboot. I was able to happily connect after that.