I'm posting my solution to this problem. I'd spent a few hours searching for an answer to my original predicament. In the end, I decided to mess around with the authenication methods and passwords of SQL Server users.
Using the SQL Enterprise Manager, I created a new user for my database on the SQL server (which is installed on the same machine as JBoss AS.) I set the password of this new user to be an "SQL Server Authentication" password. It seems single sign-on cannot be used when using JDBC connection to MS SQL Server, ie, I cannot connect using Windows account. Perhaps I'm wrong here? Note: Mixed-mode authentication is set.