You do not appear to be using the NVIDIA X driver. Please edit your X configuration file (just run `nvidia-xconfig` as root), and restart the X server.

This message kept poping up when I tried to run nvidia-settings. This happened by the way when my maximal resolution was 640x480 and number of colours was dramatically limited. I was unable to run my second screen either (xrandr was constantly crashing because of lack of randr extension). I found a solution and modified it according to my needs.

sudo apt-get install linux-headers-$(uname -r)
sudo ldconfig
sudo update-initramfs -u
sudo nvidia-xconfig
sudo reboot

Welcome back, nVidia.