Cannot enter DEBUG in NIOS IDE

I am trying to enter DEBUG mode under Nios IDE.

In the console window I can see the following:

nios2-terminal: connected to hardware target using JTAG UART on cable

nios2-terminal: "USB-Blaster [USB-0]", device 1, instance 0

nios2-terminal: (Use the IDE stop button or Ctrl-C to terminate)

Then a pop-up window shows the following error:

Launching:Error; Error creating session.Exec Error: Launching Failed.

I am working under Windows VISTA-32.

Anyone knows whats happening here?