I get this usually after SQLyog has been sitting for about 30 minutes. I'm not sure if it's just mysql recouping the connections or if there's something wrong here. FWIW, I get this when connected to mysql boxes that are remote to me and also boxes that are local to me.
There is a known problem with some libraries of RH8 which causes this error.
This error has been discussed lot of times in the MySQL Mailing List also. If you visit the RH site, they have posted a solution to this problem where you need to upgrade your libraries. This will fix the problem 😀