Yahoo messenger just does this from time to time. Its a problem with their servers. Will dissapear eventually. The best bet is to have a couple of ID's so that if you get one ID saying u have entered the wrong password you can use the other. However, sometimes no matter how many ID's you try to use it wont let you log on. Be warned, this problem can persist for days (sometimes even weeks). If you desperately need to use yahoo messenger whilst u r getting the incorrect password error, you will need to make a new ID using the selection on the messenger login window (the one that opens up when you first start messenger).
This problem that happens with yahoo messenger can be very irritating.