Forgot to mention the loopback address is properly configured on my box:
$ ifconfig lo
lo Link encap:Local Loopback
inet addr:127.0.0.1 Mask:255.0.0.0
UP LOOPBACK RUNNING MTU:16436 Metric:1
RX packets:139234 errors:0 dropped:0 overruns:0 frame:0
TX packets:139234 errors:0 dropped:0 overruns:0 carrier:0
collisions:0 txqueuelen:0
RX bytes:6975042 (6.9 MB) TX bytes:6975042 (6.9 MB)
I found some links on Google related to the "Failed to allocate
internet-domain X11 display socket" error on Solaris machines and they
were all related to missing IP configuration on the loopbak interface.
So clearly this is not the cause here...
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X11 forwarding via SSH does not work after upgrade to karmic
https://bugs.launchpad.net/bugs/434799
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