When attempting to Integrate MOSS 2007 with SQL Server 2005 Reporting Server in SharePoint integrated mode there seems to be a few reasons that the above error can occur.  Most of the solutions out there are permissions related by making sure your SSRS application pools are running as a domain user with adequate rights, If you are using the Kerberos option you mat have to set up the SPN with the SETSPN commands,  Make sure "Trusted Site" is selected in step 1 of the configuration in SharePoint, etc...

Those have been covered alot and more than likely you have already tried some of them.  One option that I found that wasn't reported on as often but has fixed my problems in a few installations is force IIS to use NTLM as your authentication method.  If you are attempting to use NTLM as your authentication method and you are getting a 401.1 Authentication error or the above error message from SharePoint.  Follow these steps and see if your issue isn't resolved.  By this time you have beaten your head against the wall for about a day as I have and anything is worth a shot.  This was the magic bullet for me.
<ol>
	<li>Open up the command line.</li>
	<li>Navigate to C:inetpubAdminScripts</li>
	<li>exceute the following command (and restart IIS afterwards for good measure)</li>
</ol>
     <span style="font-family: Courier New;">cscript adsutil.vbs set w3svc/NTAuthenticationProviders "NTLM"</span>

Navigate back to the MOSS Central Administration Site and see if you are still receiving the error.

Good Luck!