This is the exception came to me today when I try to run a workflow on a list when an item is created. I tried different combination and didn't get the problem resolved. Even I removed all workflow conditions and actions and placed a simple update like update the title of the item in workflow body. Still that didn't give me the result. The workflow is not starting at all automcatically.
After some research found that, when we are using system account [With the account we installed SharePoint], the workflows won't run automatically. This is looking crazy but that is what the problem. When I try to run them manually, then they are running absolutely fine, but they aren't starting automatically.
When I try to login with another account other than system account, no problems. Workflow starts automatically. The only reason is "if we install SP1 package, then declarative workflows can no longer be triggered by the SharePoint System account" as there is the possibility of security vulnerability. So, they didn't give access to run the declarative workflows under the System account.
So, friends, if you face any type of these problems make sure you login with some other account other than system account. Hope this helps to save at least 2-3 hours of time.