provider: SQL Network Interfaces, error: 26 - Error Locating Server/Instance Specified

Hello Mates,

I have a connectivity issue on my Application server; all application based , Sharepoint Farm and services that are set on a problematic server and connected to the DataBase suddenly stopped working, and I keep getting the following error: 

A network-related or instance-specific error occurred while establishing a connection to SQL Server. The server was not found or was not accessible. Verify that the instance name is correct and that SQL Server is configured to allow remote connections. (provider: SQL Network Interfaces, error: 26 - Error Locating Server/Instance Specified)

[SqlException (0x80131904): A network-related or instance-specific error occurred while establishing a connection to SQL Server. The server was not found or was not accessible. Verify that the instance name is correct and that SQL Server is configured to allow remote connections. (provider: SQL Network Interfaces, error: 26 - Error Locating Server/Instance Specified)]
   PNMsoft.Sequence.Runtime.WorkflowEngine.Start() +884
   PNMsoft.Sequence.Runtime.WorkflowRuntime.Run(WorkflowEngineSetup setup) +274
   PNMsoft.Sequence.Web.HttpWorkflowRuntimeHost.StartEngine() +27
   PNMsoft.Sequence.Web.WorkflowEngineHttpModule.EnsureWorkflowRuntimeEnvironment() +471
   PNMsoft.Sequence.Web.WorkflowEngineHttpModule.Init(HttpApplication context) +21
   System.Web.HttpApplication.InitModulesCommon() +124
   System.Web.HttpApplication.InitInternal(HttpContext context, HttpApplicationState state, MethodInfo[] handlers) +1162
   System.Web.HttpApplicationFactory.GetNormalApplicationInstance(HttpContext context) +312
   System.Web.HttpApplicationFactory.GetApplicationInstance(HttpContext context) +133
   System.Web.HttpRuntime.ProcessRequestInternal(HttpWorkerRequest wr) +196

Same goes when I try to start a server. 

There are no DNS issues

There are no connection issues

When I check the connection with a custom UDL file I can connect to the Database. 

I have verified all my connection strings and tried to change the connection strings to work with another SQL server, but it also fails.

Firewalls are off, on both servers (Application and SQL). AntiVirus disabled.

Default site on IIS is UP and running (therefore IIS is fine)

All points out that the connection fails, only when Web.config or Application.config files are used! 

Can I verify that ".NET" engine is working? What else can it be?

Thank you in advance,

Uri