AVG Free is an antivirus program, it doesn't include a firewall

Which OS are you using? If you use XP (not sure whether Vista's the same), go to Control Panel > Security Centre > click on Firewall & you'll see which firewall is activated. Make sure that you're only using 1 software firewall (more than 1 will cause a conflict) & that the firewall's configured to allow LW.

Also check this thread for some fixes for connection problems.
If LW Will Not Connect

If nothing there helps, post back with your system details.