FWIW, it seems that Cyrus SASL used by pidgin's libpurple is simply failing 
with error -1 SASL_FAIL, which is a generic failure.
Starting pidgin in debug mode (pidgin -d) doesn't reveal anything.

This thread on the pidgin support list caught my attention:
http://pidgin.10357.n7.nabble.com/XMPP-Server-does-not-use-any-
supported-authentication-method-td78689.html

One of the things that are suggested it to check /etc/hostname and
/etc/hosts, and to make sure that the hostname is actually present in
/etc/hosts on the 127.0.0.1 line. I checked and indeed it was not the
case, for some obscure reason. Adding it certainly fixed the issue in
pidgin.

If that does not work for you, the thread also gives pointers to start
debugging libsasl and find out where it's failing exactly.

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https://bugs.launchpad.net/bugs/975478

Title:
  Server does not use any supported authentication method

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