Are you sure the other things on your workstation that are connecting to sql are using sql authentication and not integrated security with impersonation? For when you can browse the server in VS or Query analyzer that usually using your windows login and integrated security.
Are you positive the user and password are correct and the user has permission on the db? I would review it again or if possible try an sa login temporarily and see if that gets past the issue.
If you have another .net app (using a connection string) that can connect I would give that user permission on the db and see if you can connect as him by copying the connection string from a working app and just change the db name.
I think the message is not wrong, for some reason this user can't connect.