Exchange 2007 rejects password

I have been using Mail with exchange server 2007 for over a month with no problems. Yesterday the exchange server began rejecting mi password, the password is the right one because I can access the server from my iphone, owa or outlook in a PC.
I deleted the password from the keychain, deleted and recreated the account, completely deleted all mail accounts from u
ser/library/mail and recreated all accounts, nothing works.
I suspect an update to the exchange server released 2 days ago (kb971737 - Extended Protection for Authentication in Microsoft Windows HTTP Services (WinHTTP)).
Anyone having the same problems or is it just me? ideas on a fix?

Here's something that cured my problem with the password... MAILBOX LIMIT REACHED!
I'd forgotten that I'd just received a few emails to say I was within a few MB of my Exchange Mailbox limit. Managed to prune that down to a sensible size using OWA, then right-clicked the Mailbox > Synchronize XXX Exchange Account in Mac Mail. Within seconds normal service restored.
I've read elsewhere that there's a limit using EWS on how many messages and size of mailbox that Mail can handle, so thought it was time to hack my emails down anyway. Doesn't explain why I could still access via VPN though ...?

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