Outlook 2007/2010 "Needs password", username/password prompt

What:

Outlook 2007 on Windows 7
Exchange 2007 on Windows 2008 R2

Problem:

Outlook instead normally displaying Connected in right hand bottom corner it says "Needs password" and prompt's user for username/password

Solution:

- close Outlook
- rename folder C:\Users\<username>\AppData\Roaming\Microsoft\Protect\S-1-5-21-71048937-105901603-2832788953-2261 it will be recreated
- restart pc in case user changed password, but didn't log off and log on with a new one