I bumped into this as well, with lightdm and gdm after a release upgrade from 
11.04. 
The proposed solution to remove, ~/.Xauthority and ~/.ICEauthority doesn't work 
for me.
I still don't have the solution of what triggers this but I suggest to fiddle 
with .profile, excluding some lines make the issue apparently go away. (However 
I can't afford to comment out addsshagent or virtualenwrapper in my setup)
I notice a weird thing: even declaring a simple function in my .profile 
triggers the problem ie:
damn() { export foo="boo" }
damn

this cause the gdm/lightdm not to login as described here. Does this
make any sense to you? Do you experience the same?

With kdm (no matters if I go to kde or gnome) my usual .profile expose
no problems and I can enter but I have another possibly related issue it
fails to gracefully terminate the session the screen remains still with
just the background and the mouse pointer (still working) with no
activity!

On three stupid login programs I can't even use one. 
if you have ideas please suggest, I don't think I have a very special setup but 
I'll post info if required

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You received this bug notification because you are a member of Desktop
Packages, which is subscribed to lightdm in Ubuntu.
https://bugs.launchpad.net/bugs/871667

Title:
  .Xauthority sometimes owned by root, which blocks login

Status in “lightdm” package in Ubuntu:
  Fix Committed
Status in “lightdm” source package in Oneiric:
  Fix Committed

Bug description:
  Each time I upgrade to a newer ubuntu on a particular machine, something 
breaks. Last time I was unable to log in via GDM and I have to reinstall the 
machine. This time, I upgraded to oneiric today, and, of course, lightdm cannot 
start unity nor unity-2d: after entering a correct password it just restarts 
itself.
  This is a report using apport-cli - a duplicate of 
https://bugs.launchpad.net/ubuntu/+bug/871664

  ProblemType: Bug
  DistroRelease: Ubuntu 11.10
  Package: lightdm 1.0.1-0ubuntu6
  ProcVersionSignature: Ubuntu 3.0.0-12.20-generic 3.0.4
  Uname: Linux 3.0.0-12-generic x86_64
  ApportVersion: 1.23-0ubuntu3
  Architecture: amd64
  Date: Mon Oct 10 11:58:51 2011
  EcryptfsInUse: Yes
  InstallationMedia: Ubuntu 10.10 "Maverick Meerkat" - Release amd64 (20101007)
  ProcEnviron:
   SHELL=/bin/bash
   PATH=(custom, user)
   LANG=en_US.UTF-8
   LANGUAGE=en_US.utf8
  SourcePackage: lightdm
  UpgradeStatus: Upgraded to oneiric on 2011-10-10 (0 days ago)

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