though this thread is old, it is one of the few listed when searching for this type of error.
so i want to post the solution, which helped in my case on a plesk system with centos 5.5 and postfix
The error is caused because smtpd service incorrectly announces DIGEST-MD5 as an available password encryption method, though this is not
supported by plesk (the column cmusaslsecretDIGEST-MD5 does not exist in /var/spool/postfix/plesk/passwd.db)
find sasl-configuration-file smtpd.conf, on above system it is in /usr/lib64/sasl2
change the line starting with mech_list: and remove DIGEST-MD5
#mech_list: DIGEST-MD5 CRAM-MD5 PLAIN LOGIN
#DIGEST-MD5 is not supported
mech_list: CRAM-MD5 PLAIN LOGIN
and the errors will vanish,
In fact it is not really an unrecoverable error, it is caused by clients that probe several encryption methods, in case of failure they will use the next available method.