For future reference, in case someone comes across this posting, I also ran into the same problem.  I was using SQL Profiler and I would see the lookup against that UserAuthentication table, and then I'd get a Login Failure response but couldn't figure out why, and it didn't seem to bother looking at any other user or membership tables before issuing the failure!!

I think it's because you put something other than "DNN" in the  "authType" field of the UserController calls.  When you use that field it goes straight for the UserAuthentication table. Not to mention, oddly, you don't even need the password in the call to ValidateUser once you've put in the fix below.  The presumption is that you have used a separate authentication system to make sure the user it allowed access to the site, so now all you need to do is associate the user with the internal DNN login, not actually authenticate them.

To fix this - I found a piece of code in the UserCreateCompleted method of DotNetNuke.Modules.Admin.Authentication \Login.ascx.cs:

//Assocate alternate Login with User and proceed with Login
AuthenticationController.AddUserAuthentication(e.NewUser.UserID, AuthenticationType, UserToken);