This is quite a difficult one to debug. You say "the user account can log into the database", but you don't say how, where from, or what tool(s) you are using to test this connection.
However you are testing this though, can you try it from the machine that Jira is installed on? Does that work? If so, then you need to compare that login with what you have told the Jira installation.
My SQL2005 and Jira is installed on the same server. I tried to connect to SQL2005 using SQL Server Management Studio and connect to the DB using jirauser and this user account can connect to Jira DB. If there any documents where i can re-install the SQL2005 DB and connect Jira to this SQL2005 DB? THks
Ok, then your connection settings in Jira are wrong. You need to get them right - reinstalling the database won't help you if you're getting the settings incorrect.
Read the Jira log and the database security log - those should tell you what is going wrong (having the database on the same machine makes this a little easier, as you can rule out networking type issues)
Could you check if your SQL Server have TCP/IP enabled? You can check this by going to your 'SQL Server Network Configuration' dropdown in youor SQL Server COnfiguration Manager. There, check if it's enabled, as well as if it's listening to the correct IP.
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