General ⇒ hyperref error: I cant write on file *.out

[KarolisK]

Recently I came across an error with hyperref package. Whenever I try to compile a document (for example empty.tex) with package hyperref included, I get an error:

...
! I can't write on file `empty.out'.
<to be read again>
\relax
l.4 \begin{document}

Please type another output file name
...

and the file is not even created. I do realise this might be non-latex related. Any thoughts? Thank you in advance.

Note: If hyperref is used with draft option set to true, the file is compiled.
Note2: As far as I have tried no other package produces the error.

Additional note: Currently running on MikTex 2.9 x64, TxC 2.02(stable) x64 using SumatraPDF. OS: Windows XP x64.

The things I have tried so far:

• Deleting all previous *aux or *pdf files and recompiling
  Changing the PDF viewer (tried Acrobat Reader 9,11)
  Full reinstall of MikTex and TxC(both were x86 previously)
  Restarting windows

[josephwright]

Have you deleted the other temporary files in the folder your document is in?

[KarolisK]

Yep, tried deleting everything except *.tex file. It is strange that other auxiliary files like *.aux, *.tps are created, so I am assuming it is not something with windows permissions?