see http://www.celticwolf.com/useful-information/faqs/26-pidgin-yahoo

the link is provided from their help main page:
http://www.pidgin.im/support/

this seems a temporary fix and the next version (2.6.0) of pidgin seems
to be needed for all of us (not just the next ubuntu release)...

"As of June 17, 2009, Pidgin users are having trouble connecting to
Yahoo! IM accounts.  Here is a summary of the problem:

Yahoo! appears to be upgrading their servers to a new version of their
software.  This new version requires a new authentication method.  The
latest version of Pidgin, 2.5.6, does not support this new
authentication method.  The next version, 2.6.0, will, but it has not
yet been released.

The domain name that is used to connect to Yahoo! servers is
"scs.msg.yahoo.com".  This domain name is actually mapped to multiple
servers.  Some of these servers have been upgraded, while others
haven't.  As a result, you may see intermittent failures, or you may
fail every time, while your neighbor logs in successfully.  It's
effectively a roll of the dice."


** Summary changed:

- Pidgin 2.5.5 and 2.5.6 will not connect to Yahoo! server.
+ Yahoo server authentication changed: Pidgin =<2.5.6 will not connect to 
Yahoo! servers.

-- 
Yahoo server authentication changed: Pidgin =<2.5.6 will not connect to Yahoo! 
servers.
https://bugs.launchpad.net/bugs/389322
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