User's $home/.dmrc file is being ignored. This prevents the default session and language from being saved. File should be owned by user and have 644 permission. User's $home directory must be owned by user and not writable by other user's.
It seems to be a bug in Ubuntu. It turned out that the same error message appeared on a Ubuntu Jaunty (Gnome) fresh install and on my Linux Mint 7 (based on Ubuntu Jaunty) fresh install. From time to time it shows up and I have not figured out how to (re-)produce it.
chmod 644 .dmrc
chmod o-w /home/USER
does the job, where USER has to be replaced by you username.