I found the solution for this issue at http://www.jschweg.com/2011/05/enabling-network-level-authentication-for-rdp-in-xp-sp3/

 

Windows Vista/7/2008 has the option of requiring Network Level Authentication when acting as a Remote Desktop host. Without going into any great detail, NLA offers a higher level of security for your RDP sessions, and a lower resource requirement during the authentication process.

This setting is controlled by the dialog below under [My Computer Properties\Remote Settings], and during the Remote Desktop Services setup procedure if you are building a Terminal Server.

You may notice that RDP connections from a Windows XP workstation to an NLA host will fail with the following error:

The remote computer requires Network Level Authentication, which your computer does not support

This, of course, could be rectified by disabling the requirement for NLA on the Remote Desktop host, however NLA support can be very easily added to Windows XP SP3 by making the following changes to the Windows Registry (Note that the following instructions below are copied directly from KB951608:

  1. Click Start, click Run, type regedit, and then press ENTER.
  2. In the navigation pane, locate and then click the following registry subkey:
         HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\Lsa
  3. In the details pane, right-click Security Packages, and then click Modify.
  4. In the Value data box, type tspkg. Leave any data that is specific to other SSPs, and then click OK.
  5. In the navigation pane, locate and then click the following registry subkey:
         HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\SecurityProviders
  6. In the details pane, right-click SecurityProviders, and then click Modify.
  7. In the Value data box, type credssp.dll. Leave any data that is specific to other SSPs, and then click OK.
  8. Exit Registry Editor.
  9. Restart the computer.

After performing the above, you shouldn’t have any trouble connecting to an NLA host from an XP Workstation.