As long as you have POP enabled on your server, you can use it for authentication. I have done this at a number of schools. IMAP should work, but for some reason I could never work it out. POP does the trick.
LDAP would be better, as you would be able to assign different user groups different rights in moodle, but until SME Server allows LDAP Authentication, maybe in SME 8

, POP's the way to go. By the way, I have also used POP authentication and pGina to allow XP Home clients to connect to the SME Server as if they were Pro machines. Nice for companies that purchased computers with XP Home on them, not knowing that they would be next to useless for business purposes.
Good luck.