create user xxx with md5 string?

Hi all. Im triyng, with no success, to create a user, and set the
password with a md5 string.

I did this:

comechingon:~ # echo -n 123 | md5sum
202cb962ac59075b964b07152d234b70 -

Ok, so then
test=# CREATE USER foobar ENCRYPTED PASSWORD
'md5202cb962ac59075b964b07152d234b70'; --I have to add 'md5' at the
begging of the string
CREATE ROLE

test=# SELECT * from pg_shadow where usename='foobar';
usename | usesysid | usecreatedb | usesuper | usecatupd |
passwd | valuntil | useconfig
---------+----------+-------------+----------+-----------+-------------------------------------+----------+-----------
foobar | 3250592 | f | f | f |
md5202cb962ac59075b964b07152d234b70 | |
(1 row)

test=# \c test foobar
Password for user foobar: [123, off course]
FATAL: password authentication failed for user "foobar"
Previous connection kept

test=# SHOW server_version;
server_version
----------------
8.3.6

Im wondering which my mystake is:
Using md5sum?

I do have 'md5' as validation mechanism in pg_hba.conf

Any hints?
Thanks!

Gerardo