diff --git a/homeassistant/components/daikin/config_flow.py b/homeassistant/components/daikin/config_flow.py
index ea0709e5557..43d169e3440 100644
--- a/homeassistant/components/daikin/config_flow.py
+++ b/homeassistant/components/daikin/config_flow.py
@@ -75,7 +75,8 @@ class FlowHandler(config_entries.ConfigFlow, domain=DOMAIN):
                     uuid=uuid,
                     password=password,
                 )
-        except asyncio.TimeoutError:
+        except (asyncio.TimeoutError, ClientError):
+            self.host = None
             return self.async_show_form(
                 step_id="user",
                 data_schema=self.schema,
@@ -87,13 +88,6 @@ class FlowHandler(config_entries.ConfigFlow, domain=DOMAIN):
                 data_schema=self.schema,
                 errors={"base": "invalid_auth"},
             )
-        except ClientError:
-            _LOGGER.exception("ClientError")
-            return self.async_show_form(
-                step_id="user",
-                data_schema=self.schema,
-                errors={"base": "unknown"},
-            )
         except Exception:  # pylint: disable=broad-except
             _LOGGER.exception("Unexpected error creating device")
             return self.async_show_form(
@@ -109,6 +103,13 @@ class FlowHandler(config_entries.ConfigFlow, domain=DOMAIN):
         """User initiated config flow."""
         if user_input is None:
             return self.async_show_form(step_id="user", data_schema=self.schema)
+        if user_input.get(CONF_API_KEY) and user_input.get(CONF_PASSWORD):
+            self.host = user_input.get(CONF_HOST)
+            return self.async_show_form(
+                step_id="user",
+                data_schema=self.schema,
+                errors={"base": "api_password"},
+            )
         return await self._create_device(
             user_input[CONF_HOST],
             user_input.get(CONF_API_KEY),
diff --git a/homeassistant/components/daikin/strings.json b/homeassistant/components/daikin/strings.json
index fc2b6e79a5e..5c759384795 100644
--- a/homeassistant/components/daikin/strings.json
+++ b/homeassistant/components/daikin/strings.json
@@ -18,6 +18,7 @@
     "error": {
       "unknown": "[%key:common::config_flow::error::unknown%]",
       "invalid_auth": "[%key:common::config_flow::error::invalid_auth%]",
+      "api_password": "[%key:common::config_flow::error::invalid_auth%], use either API Key or Password.",
       "cannot_connect": "[%key:common::config_flow::error::cannot_connect%]"
     }
   }
diff --git a/homeassistant/components/daikin/translations/en.json b/homeassistant/components/daikin/translations/en.json
index d1db170d769..84843ba8211 100644
--- a/homeassistant/components/daikin/translations/en.json
+++ b/homeassistant/components/daikin/translations/en.json
@@ -5,6 +5,7 @@
             "cannot_connect": "Failed to connect"
         },
         "error": {
+            "api_password": "Invalid authentication, use either API Key or Password.",
             "cannot_connect": "Failed to connect",
             "invalid_auth": "Invalid authentication",
             "unknown": "Unexpected error"
diff --git a/tests/components/daikin/test_config_flow.py b/tests/components/daikin/test_config_flow.py
index 624268d7ee3..91ea79f4aa7 100644
--- a/tests/components/daikin/test_config_flow.py
+++ b/tests/components/daikin/test_config_flow.py
@@ -3,13 +3,12 @@
 import asyncio
 from unittest.mock import PropertyMock, patch
 
-from aiohttp import ClientError
-from aiohttp.web_exceptions import HTTPForbidden
+from aiohttp import ClientError, web_exceptions
 import pytest
 
 from homeassistant.components.daikin.const import KEY_MAC
 from homeassistant.config_entries import SOURCE_USER, SOURCE_ZEROCONF
-from homeassistant.const import CONF_HOST
+from homeassistant.const import CONF_API_KEY, CONF_HOST, CONF_PASSWORD
 from homeassistant.data_entry_flow import (
     RESULT_TYPE_ABORT,
     RESULT_TYPE_CREATE_ENTRY,
@@ -84,8 +83,8 @@ async def test_abort_if_already_setup(hass, mock_daikin):
     "s_effect,reason",
     [
         (asyncio.TimeoutError, "cannot_connect"),
-        (HTTPForbidden, "invalid_auth"),
-        (ClientError, "unknown"),
+        (ClientError, "cannot_connect"),
+        (web_exceptions.HTTPForbidden, "invalid_auth"),
         (Exception, "unknown"),
     ],
 )
@@ -103,6 +102,18 @@ async def test_device_abort(hass, mock_daikin, s_effect, reason):
     assert result["step_id"] == "user"
 
 
+async def test_api_password_abort(hass):
+    """Test device abort."""
+    result = await hass.config_entries.flow.async_init(
+        "daikin",
+        context={"source": SOURCE_USER},
+        data={CONF_HOST: HOST, CONF_API_KEY: "aa", CONF_PASSWORD: "aa"},
+    )
+    assert result["type"] == RESULT_TYPE_FORM
+    assert result["errors"] == {"base": "api_password"}
+    assert result["step_id"] == "user"
+
+
 @pytest.mark.parametrize(
     "source, data, unique_id",
     [