I managed to narrow the problem to the lightdm package by using lightdm from oneiric on a precise machine and it seems to work there.
** Package changed: pam (Ubuntu) => lightdm (Ubuntu) -- You received this bug notification because you are a member of Ubuntu Bugs, which is subscribed to Ubuntu. https://bugs.launchpad.net/bugs/956848 Title: pam_mkhomedir.so fails to create homedir in precise To manage notifications about this bug go to: https://bugs.launchpad.net/ubuntu/+source/lightdm/+bug/956848/+subscriptions -- ubuntu-bugs mailing list ubuntu-bugs@lists.ubuntu.com https://lists.ubuntu.com/mailman/listinfo/ubuntu-bugs