A lot of info here which may or may not apply . Please bear with me . I am running FC5 and just built the kernel (2.6.26-1.2080) to exclude "default linux capabilities" so i could use dazuko kernel module. To do this I had to enable source and testing in repos to get the neccesary tools . Then did a yum update .It updated to kde 3.5.2. and I am now unable to login in to my user account with that kernel. Root works fine. Kernel 2.6.15-1.2054 works fine with the new kde in root and user account.
--Problem--
2.6.16 rebuild : avahid times out and can only login to root account.
/var/logs/messages :
avahi-daemon[3015]: cap_set_proc() failed: Operation not permitted
avahi-daemon[3095]: cap_set_proc() failed: Operation not permitted
avahi-daemon[3055]: Found user 'avahi' (UID 70) and group 'avahi' (GID 70).
avahi-daemon[3055]: Successfully dropped root privileges.
avahi-daemon[3055]: avahi-daemon 0.6.9 starting up.
avahi-daemon[3055]: WARNING: No NSS support for mDNS detected, consider installing nss-mdns!
avahi-daemon[3055]: Successfully called chroot().
avahi-daemon[3055]: Successfully dropped remaining capabilities.
avahi-daemon[3055]: Failed to read service directory.
avahi-daemon[3055]: New relevant interface eth0.IPv4 for mDNS.
avahi-daemon[3055]: Joining mDNS multicast group on interface eth0.IPv4 with address 192.168.1.100.
avahi-daemon[3055]: Network interface enumeration completed.

Have you tested the newer kernel without the dazuko module? Dazuko works by intercepting some access calls, so it's possible it could be causing problems with a new kernel.
I don't think the avahi is going to be strictly related to the problem, since it's a service, not a module. So, unless it's the only place you're seeing the failure, you might want to just disable it for a bit to try and isolate the problem. Am I right in assuming that ALL users are unable to login except for root?

I created another user account to try that and could not login to that account either.I will do some trial and error testing and post back. I did some of this last night and just remembered I had a full /tmp file ( no room left ) .

It seems a bit unlikely that the /tmp is causing problems... it's possible I guess. Losing user access due to a kernel change is a pretty unusual problem - and I can't think of anything OUTSIDE the kernel which could cause it, which makes me suspicous of the dazuko module.

If you can, try to isolate the problem as much as possible to the module or the specific kernel version which fails with it. Jumping from 2.6.15 to 2.6.26 really _shouldn't_ be a problem, but it's still a significant version leap.

- couple'a stupid questions I should have already asked :
Are you using graphical login or text?
Can you change from root to a different user using the 'su' command?
Are you compiling the kernel and the module, or are you using precompiled binaries?
Are you excluding the default capabilities entirely, or are you building them as a module?
Is the dazuko module even running yet at login time, or does it load on demand from an app?

GOT IT . Apparently capability module must be running or avahi cant start. Once this mod was loaded I could finally start avahid , then I could login as usual . Great. However now it seems I have two user accounts with the same name ; One is under the 2.6.15 kernel , and it is exactly the same as before. The other is under the new kernel and is a default user account . ??????

hmm. got me on that one. AFAIK, the kernels shouldn't be reading the users differently. I'd just try getting rid of it and seeing what happens. The original one should be setup in a wheel file somewhere, so it shouldn't matter if the actual user gets erased. Why the 2.6.15 doesn't pick it up is a good question.