I know I had the same error message when trying to connect to the database after adding a mysql username and password.
Basically when you insert into the MYSQL database a username and password that you wish to be able to connect to ANY mysql database.
When you do so you MUST MUST MUST use the password(whateveryoupasswordis) command to define the password.
Otherwise it switched to OLD mode because of the format of the password.
The solution would be to delete the MYSQL folder in the c:\mysql\data folder, then reinstall MySQL and when adding a username and password for access use the following commands:
run a dos command box
go to the c:\mysql\bin directory
type "mysql" and hit enter
type "use mysql" at the mysql prompt
then type:
insert into user (host, user, password) values ('localhost', 'yourusername', password('yourpassword');
then hit enter.
Hope all goes well!
Mike