If you are running SQL server on the same server, the Windows SharePoint Services search logon account may not have the correct permission to access or to query the Windows SharePoint Services database on the computer that is running SQL Server. To work around this issue, stop the Windows SharePoint Services Search service. Then, add a domain account that has permissions to access the computer that is running SQL Server. To do this, follow these steps:
1. Use an account that has administrative permissions to log on to the computer that is running Windows SharePoint Services 3.0.
2. Click Start, click Run, type cmd in the Open box, and then click OK.
3. At the command prompt, move to the %programfiles%\common files\microsoft shared\web server extensions\12\bin folder.
4. Type the following at the command prompt, and then press ENTER: "stsadm -o spsearch -action stop". This command stops and disables the Windows SharePoint Services Search service.
5. Click Start, point to Administrative Tools, and then click Services.
6. In the Services MMC snap-in, right-click Windows SharePoint Services Search, and then click Properties.
7. In the Windows SharePoint Services Search Properties dialog box click the Log On tab.
8. Click This account, type the name of the domain account that has the correct permissions, type the password, and then type the password again in the Confirm password box.
9. Click the General tab, click the list next to Startup type, and the click Automatic. Click Apply, click Start, and then click OK
 
If the issue persists, please download and apply the WSS 3.0 update 934525. More information here:
 
Description of the security update for Windows SharePoint Services 3.0
http://support.microsoft.com/kb/934525
 
SharePoint Products and Technologies Wizard Fails on Step 5
http://www.experts-exchange.com/OS/...01263.html