Hi All,
There is no problem with hibernate in SQL Azure the connection related problem occurs due to the firewall in SQL Azure. I'm pasting the possible reason from a discussion over here...
To help protect data by default, all access to SQL Azure server is blocked by the SQL Azure firewall; connection attempts originating from
the Internet or Windows Azure will not be able to reach your SQL Azure server. In order to begin using SQL Azure server from web applications, one need to specify firewall one or more firewall settings that enable access to SQL Azure server.
Connecting From Internet
When a computer attempts to connect to your SQL Azure server from the Internet, the SQL Azure firewall checks the originating IP address of
the request against the full set of firewall settings. If the IP address of the request is not within one of the ranges specified, the connection attempt is blocked and does not reach the SQL Azure server.
Connecting from Windows Azure
When an application from Windows Azure attempts to connect to your SQL Azure server, the SQL Azure firewall looks for a specific firewall setting that indicates whether
Windows Azure connections are allowed.
A firewall setting with starting and ending address equal to 0.0.0.0 indicates that Windows Azure connections are allowed. If the connection attempt is not allowed, the request does not reach the SQL Azure server.

Thanks & Regards
writs