sshd logs an error Failed to allocate internet-domain X11 display socket

Issue

• I cannot run graphical programs on a remote system with X11 forwarding over ssh:

      [user@localhost ~]$ ssh -X hostname.example.com
      Last login: Fri Oct 14 13:53:43 2011 from 192.168.1.2
      [user@hostname ~]$ xeyes
      Error: Can't open display:
  

• Unable to open the virt-manager, getting an error "virt-manager: Unable to initialize GTK: could not open display".

• The /var/log/secure on the remote host contains the error message:

      Oct 14 15:00:07 hostname sshd[1909]: error: Failed to allocate internet-domain X11 display socket.