We are using Team City and I noticed problem during running Watin test. Sometimes some instance of IE randomly just don't stop in task manager on build server, even if test closes all opened instances. This causes failure of all tests that follows. We tried with script that kills all instances of ie before this test starts runing, but that can't prevent random unstopped instances of ie that crashes all tests.
I don't know if it will help but.... I had a similar error. My issue was: "running the tests on Vista with internet explorer having protectedMode = On for localhost "
The solution is documented here: http://codebetter.com/blogs/james.kovacs/archive/2008/06/18/running-watin-tests-on-vista.aspx
I think you could be having the same issue.