Tested with Linux(xfce, xterm session, windowmaker) and Windwos XP. The Problem does not occur in the Windows environment where the log-in remains usable.

Register some database connected to a password protected datasource. A password protected spreadsheet connection will do. Close everything, so the connection is closed.
Get a spreadsheet document, select an arbitrary cell range, hit F4, drop down the datasource so you see the 2 tree icons for [+]Tables and [+]Queries.
Now drag the cell range onto the tables icon which is supposed to trigger the data import dialog. When the datasource is password protected, the following happens:
As soon as the mouse cursor touches the target icon it shows the "no parking" symbol, the whole destop environment is unresponsive while the log-in dialog pops up which also can not be filled out. I have to kill soffice.bin from a terminal session.

The problem does not occur when you first drop down the [+]Tables tree so you are prompted to log in before the drag&drop operation. Nevertheless, you need to drop your data on the Tables icon. It is the only spot where sheet cells can be dropped.
A solution I can think of: 
Disable the tables drop and enable the drop on a particular table, so you have to log-in before you get any drop target. Pasting data into a particular table might be the most frequently used scenario anyway.
My personal wish: Enable drop to query where a well prepared query reflects the right colunm order so you can confirm the import dialog with dialog settings.

Many people collect bank account data in spreadsheets. A simple database drop could be a huge progress even if you still need a spreadsheet to handle the broken csv flavours commonly used by European banksters.