Encapsulation Failure

I am getting following error in 3725.
***********************************************************************
ASBR2#show debugging
ARP:
  ARP packet debugging is on
Generic IP:
  ICMP packet debugging is on
  IP packet debugging is on

ASBR2#ping 172.16.240.4 repeat 1

Type escape sequence to abort.
Sending 1, 100-byte ICMP Echos to 172.16.240.4, timeout is 2 seconds:

*Mar 1 01:04:22.247: IP: s=172.16.240.1 (local), d=172.16.240.4
(FastEthernet0/0), len 100, sending
*Mar 1 01:04:22.251: IP ARP: sent req src 172.16.240.1 c209.0dc0.0000,
                 dst 172.16.240.4 0000.0000.0000 FastEthernet0/0
*Mar 1 01:04:22.255: IP: s=172.16.240.1 (local), d=172.16.240.4
(FastEthernet0/0), len 100,* encapsulation failed*.
Success rate is 0 percent (0/1)
ASBR2#

interface FastEthernet0/0
 ip address 172.16.240.1 255.255.255.0
 speed 100
 full-duplex

The problem is there for all 3725 interfaces ( both sub-interface & physical
interface). I am using GNS3 and image is c3725-is-mz-122-15.T2.bin

Am I missing any configuration here?

-- 
*Regards,*
*John*
Blogs and organic groups at http://www.ccie.net