It seems that Yahoo has dropped support for legacy way of login, causing some problems with Pidgin. Possible solutions:

• Update to version 2.5.7 (works for me :-))
• Accounts -> Edit account (to yahoo account) -> Advanced -> and to Pager Server erase “scs.msg.yahoo.com” and put instead 66.163.181.189

Further info:

• The bug on Launchpad – also gives a more detailed list of alternative IPs
• The blogpost announcing Pidgin 2.5.7
• Update: even more information abut the issue.

Picture taken from BlueLinden’s photostream with permission.