This again as in the previous Joomla branches is caused by the missing Joomla authentication plugin. The difference is that in Joomla 1.7 these plugins reside in the extensions table, rather than in the plugins table as in the previous versions.
To enable it, browse your Joomla 1.7 database via phpmyadmin, click on the extensions table and browse its content. Find the row with “plg_authentication_joomla” in the name column, change the value 0 to 1 in the column named “enabled” and hit the “Go” button to save the changes. After the plugin is enabled, the error message should be gone and you should be able to login with a valid login pair.
A direct SQL query for enabling this plugin is:
UPDATE `database_name`.`jos_extensions` SET `enabled` = ‘1’ WHERE `jos_extensions`.`name` = ‘plg_authentication_joomla’ limit 1;