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Paypal - Phishing Check
This is a quick check that you always have to do when it comes to entering paypal information. For more detail, read my article on paypal phishing.
Did you get to the login page through an email link? Exit immediately and change any information that you gave them. It's probably a phishing website. Unless they address you by name and use an official paypal address, it's not real. Even then, don't ever use email links. It's a bad habit and you should always use the formal web address to be safe.
Also check the actual website address. Is it based off of "https://www.paypal.com"? If it isn't exactly that, then it's another spoof website trying to pull off a phishing scam for your information. Note that you need to check this even if you started out on the official paypal website. It isn't out of the question for malware to redirect you from the paypal website to a well built spoof website.
If you used the real paypal website and the address is real, then it's probably a legitimate hold on your account and you'll need to do a little work with paypal support.
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Paypal - Requesting a New Password or Account Information at Login
This appears to be a type of security hold. When you try to login to paypal, the login screen asks you to change your password or confirm some account information. If it's not a paypal phishing scam, then you just have a restriction on your account. This could happen for a number of reasons.
It's basically the same as a credit card company calling to ask about strange or suspicious purchases. If something raises a red flag on their system, then the account can get flagged for a security hold. Note that this may be something incredibly minor. Chances are that it means that your account is still fairly safe (good hackers and phishers usually don't get caught, the money just disappears without much fanfare). In the case of a paypal account, it is possibly a login attempt from a foreign IP address or from multiple IP addresses in a close time frame. If you also started using an inactive account frequently, it may be flagged. Large purchases, especially purchases or payments above the spending limit or receiving limit, will also reliably do this.
Note that you just need to contact support to see what's wrong with your account. Sometimes the dispute resolution for your account will explain the direct cause. They might just need more information to verify your account completely.
If there isn't a clear answer to why paypal needs additional information, just contact support. Call the paypal support line (1-402-935-2050) or send an email to their support account. They should be able to sort it out easily and correct any unnecessary flags. Note that if you plan to call, go through their support page and click the "contact us" button. They make everyone type out their question to see if it's been answered easily before. The real reason to go through this quick process is to use their link for the phone number. If you want to discuss a specific account, then you need to login to your account through the support page to get a secure web PIN. You'll need to use this PIN number to allow them to talk about a specific account.
After that, you just need to address the problem and have the flag removed.
Image Credit: Wikipedia Commons - http://commons.wikimedia.org/wiki/File:PayPal_Security_Key.jpg