It would seem that the very exact sounding error message is misleading...
"The newsequentialid() built-in function can only be used in a DEFAULT expression for a column of type 'uniqueidentifier' in a CREATE TABLE or ALTER TABLE statement. It cannot be combined with other operators to form a complex scalar expression."
One of our our devs kindly disproved this by inserting into a table with a newsequentialid() default column, just by a slightly different insert syntax.
Imagine the table has two columns, the second being the default column in question.
I was using:
insert [thetable] select 1
...which got the error msg - (oh no, I'm going to have to use newid() which causes fragmentation etc)
Whereas he succeeded using a column list in the insert defintion, ie:
insert [thetable] (col1) select 1
...which resulted in 1 in the first column and a correct newsequentialid() in the second column.
(this is all part of manually cranking the prep of tables for some merge replication crusade :-))