There are some ways of fixing this on the internet. It has been reported that if you continue trying to connect, you could be in a final connected or redirected to a server which allows authentication in the old way. However, theoretically spoken, this solution is only temporary. If you disconnect, you'll probably have again problems connecting. Other users reported that changing the server on which the application is logging on may resolve the problem. I've tried changing it between scsa.msg.yahoo.com, cn.scs.msg.yahoo.com, scs.msg.yahoo.com and other addresses like these. I tried to change the address even with server's IP address directly (thinking that it could be an address resolving problem), everything with no luck.
But I continued trying, and after tens of forums and blogs, I found on brainstorms.in a user who reported that changing the server to scsd.msg.yahoo.com works. And it really works. So, if you have this problem, click on Accounts -> (on your account) Edit Accounts -> Advanced, and on the first row (Pager server), put "scsd.msg.yahoo.com".
Please leave a comment to know if this fixed your problem or not.