The owner was root:root, must have changed it by mistake when I put back
password from previous install of Ubuntu. Doing chown root:shadow
/etc/shadow and chmod u=r,g=r /etc/shadow fixed the problem.

Thanks for the tip. Have to be more careful next time I modify shadow
and password files.

So this is not a bug about screensaver not accepting valid password, but
a bug raport of the screensaver not showing warning message about wrong
permissions in the /etc/shadow file.

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Password does not unlock screen
https://bugs.launchpad.net/bugs/600631
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