I had the same issue with nvidia 96.43.09. So it seems that this issue
is more related to video group not being created, than drivers itself.

I fixed this with, creating video group and added users to it. Then
modified /etc/modprobe.d/nvidia-kernel-nkc as suggested (chainged video
group number to correct one).

-- 
NVIDIA: Direct rendering failed
https://bugs.launchpad.net/bugs/281747
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