This just happened to me on Ubuntu Karmic using Empathy 2.28.1.1. As a 
workaround;
1/ quit empathy via Chat > Quit
2/ In a terminal to find and the butterfly task via "sudo ps -A | grep 
telepathy-butte" then kill it via "sudo kill nnnn" where nnnn is the task number
3/ Restart empathy via Applications > Internet > Empathy IM Client
Now connects to MSN ok.

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Can't connect to msn accounts
https://bugs.launchpad.net/bugs/255307
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