Hello again Fiona,
I searched around the forum a bit and found that this error can mean that either there is something wrong with the OSJTAG connection, either the target device is not the expected one.
So here is some additional info that I thought might help identifying the problem:
- checked Device Manager and the PE Micro driver seems to be installed and without problems. Driver date: 12/12/2011, Driver version: 1.2.3.0
- managed to grab a print screen of the console (for some reason it is cleared immediately when the error message appears and I missed some messages):

- found a thread which is dedicated to the same problem I have:Error: Failed to resume target process. Downloading binary to target... in which you responded. My target and debug configurations are as described in this thread with only one exception, the "Target communication speed" field. I do not have multiple options in the "Debug Shift Freq field". I have tried to change the "delay after reset" settings as in the other thread but the result was the same.

- the target is set to MPC5606B and this the the micro on my kit board.
- the board image posted by you in the other thread has the exact same jumper settings as mine
- when I first connected my board and tried debugging, CW asked for a firmware update which I did successfully.
Could this problem be caused by a faulty board? It was bought at the end of last year, so there were no other users that might have damaged it.
I hope this information can lead to the problem and of course to the solution. If I missed something relevant please tell me and I will provide the info.
Thanks in advance!