Profile: HTC Hero on Sprint
Droid version 1.56.651.2
Not sure of the cause in my case, but here's what worked for me to resolve this issue and reload my contacts from my gmail Contact list.
I didn't have a MyFaves application under Settings > Applications > Manage Applications. But I did have an app called Contacts Storage that happened to be occupying 240K of Data. I tapped the Clear data button, returned to Settings > Data Synchronization > Google and re-enabled Contacts sync. Instead of the alert notification and error message, all my contacts were restored.
AFAIK, all I did to get into this situation was to delete all my contacts so I could clean up the list in my gmail account using my PC, and then try to reload. Hope this bit of fluff helps.
- sbgildroid