Connect it with the other daemon and retry the command, please
Ok, I now have 2 Ubuntu Linux machines running a freshly compiled daemon. One is a virtual machine, the other is a laptop.
The laptop is running ./litecoind &
The virtual machine is running ./litecoind -connect=192.168.40.3 &
Both daemon's give this:
hi@UbuntuVM1:~/Desktop/lz/src$ ./litecoind getblocktemplate '{"mode":"template"}'
error: {"code":-10,"message":"Litecoin is downloading blocks..."}
hi@UbuntuVM1:~/Desktop/lz/src$
Then recreate the genesis block with the updated creation time, so its time within the same 24h period as current time.
Then retry getblocktemplate call and setgenerate in this order.
If getblocktemplate succeeds but the setgenerate fails then try to find a block with external miner like minerd or cgminer.
If both methods (setgenerate and mining with external mining) fails then most likely some parameters that control the new difficulty calculation are improperly selected.