Found the following using google...
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A connection could not be established. Login failed.
Reason: not associated with a trusted SQL Server connection
After a few minutes of messing about and scratching my head, I remembered that while I was trying something else out I had previously set my default client connection type to TCP sockets, which of course don't support trusted connections! Oops. All went well once I had restored the default connection to named pipes. IOW, your SQL Server must support named pipes or multiprotocol for this method to work, which may require rerunning the setup application.
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Also, take a look at
http://support.microsoft.com/default.aspx?scid=kb;en-us;Q307002