This problem also makes it impossible to add a new user and then login as that 
user.  If the newuser is created in terminal then:
$ sudo adduser testing
[sudo] password for colinl:
Adding user `testing' ...
Adding new group `testing' (1005) ...
Adding new user `testing' (1005) with group `testing' ...
Creating home directory `/home/testing' ...
Copying files from `/etc/skel' ...
passwd: System error
passwd: password unchanged
Try again? [y/N]

If the user is added using System, Users and Groups then the add appears
to be ok but attempted login gives authorization failure.

The workaround given above fixes both.

Ubuntu version: 10.04, fully updated as of 26-03-2010.
Architecture: 32 bit

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Error WBC_ERR_DOMAIN_NOT_FOUND in pam_winbind causes passwd to fail
https://bugs.launchpad.net/bugs/545864
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