Web services does not support custom web templates error
If you are in a similar client environment as I am, you might have a Service Account that runs SharePoint, which has DBCreator and Security Admin rights in SQL Server, but being at a client site, your "mortal" user account login may only have Local Admin rights to the SharePoint Server for administration purposes. This has caused me headaches in the past.
I just ran into this problem (web service does not support custom web templates) this morning (and I have used SharePoint custom site templates for years) and although support.microsoft.com and google.com provided no answer, it occured to me to log in using the Service Account (that I'm using to run the SharePoint Application Pool and the same account that has full access to SQL Server), and run stsadm with that account. Sure enough, that's what it was...it worked like a champ.
My guess is that if the account you are logged in with does not have sufficient (or any) access rights to the SQL Server that SharePoint uses, this is what's causing this cryptic error message to occur when you try to add a custom template to the central template site library.
reprinted from msdn blogs.
