Although it's an old question, for the benefit of future users who visit this yet unanswered question, here is the solution that worked for me.
In my case, the following worked.
Symptom :
The ASP.NET tab, for the "Default Website" node of the IIS Admin was showing a version of 1.1.
The ASP.NET tab, for my virtual directory application, was showing a version of 2.0 (which is the right one for my application).
Solution :
I changed the first one from 1.1 to 2.0. The application worked.
Cause :
The cause, however, seems "mysteriously unrelated", as it often happens in Windows. It was working fine with the same old (different) settings until a week back. What happened during the week, was that the machine A running the web server for my web application, had to unjoin a domain B and join another domain C, because the primary domain controller on B failed and had to be replaced with C. Why on earth would that affect IIS Admin or the web application hosted on A, and why it should generate this particular error is beyond me. Such a cause for this error seems undocumented.