I have similar problem. Two application server exactly the same configuration one works fionr one reports this error. I use TCP/IP only, telnet works fine but in ODBC or OLE DB provider this error.
MCP ID# 1115468 Ceritified Since 1998
MCP, MCSE, MCP+I, MCSE+I, MCSA,
MCDBA SQL7.0 SQL 2000, MCTS SQL 2005