You did not mention you were on Joomla 1.6. This is a permissions issue.
Under Joomla global configuration followed by permissions you can see under Registered that Site Login is in a Conflict state and is set as Not Allowed (Locked).
The above is because under Public you have set Site Login to denied. Keep in mind permissions are parent > child based. If you set the parent of Registered (which is Public) to deny login then you also deny login for Registered. This of course will have no affect on Super Administrators and such.
I've fixed this for you and confirmed working, please also confirm login is working.