I ran into this problem today. I had an .rdl file in a Visual Studio Project that had a problem with it. This is a development area where no security is needed on the data sources. Since I had a deployed version of it out on the Report Server, I figured I would just edit the report definition there to create a new rdl file, delete the problem file out of my project, then use Reports > Add > Existing Item...
in the Solution Explorer to bring a working copy of the report back in.
It seems to work at first, until I made any kind of change to the report in the VS design tab. Then I'd get the error quoted at the top of this thread. What was going on?
I can't speak to why the <Connection String> tag was automatically being inserted into the rdl code, but deleting it AND changing the value of the <rd:SecurityType> tag inside a <Datasource> tag did the trick:
"Value" was changed from >Windows< back to >None< . It was all too easy to forget that the security settings on a deployed report get modified and can cause problems when brought back into your development environment.
Hopefully this helps someone else trying to puzzle out this particular error and how to fix it.