The requested monitor rule (xxxx) can only be applied to pool members.

What toolkit are you using to generate this request. I don't see the correct array references for the encoding method we are using. I generated a call with the Perl SOAP::Lite toolkit and this worked for me:

SOAPAction: "urn:iControl:LocalLB/PoolMemberset_monitor_association"
< ?xml version="1.0"encoding="UTF-8"?>
< soap:Envelope
    xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance"
    xmlns:soapenc="http://schemas.xmlsoap.org/soap/encoding/"
    xmlns:xsd="http://www.w3.org/2001/XMLSchema"
    soap:encodingStyle="http://schemas.xmlsoap.org/soap/encoding/"
    xmlns:soap="http://schemas.xmlsoap.org/soap/envelope/">
  < soap:Body>
    < set_monitor_association xmlns="urn:iControl:LocalLB/PoolMember">
      < pool_names soapenc:arrayType="xsd:string[1]" xsi:type="soapenc:Array">
        < item xsi:type="xsd:string">catbert-http< /item>
      < /pool_names>
      < monitor_associations soapenc:arrayType="soapenc:Array[1]" xsi:type="soapenc:Array">
        < item soapenc:arrayType="xsd:anyType[1]" xsi:type="soapenc:Array">
          < item>
            < member>
              < ipport>
                < address xsi:type="xsd:string">10.10.10.148< /address>
                < port xsi:type="xsd:int">80< /port>
              < /ipport>
              < address_type xsi:type="xsd:string">ATYPE_EXPLICIT_ADDRESS_EXPLICIT_PORT< /address_type>
            < /member>
            < monitor_rule>
              < type xsi:type="xsd:string">MONITOR_RULE_TYPE_SINGLE< /type>
              < quorum xsi:type="xsd:int">0< /quorum>
              < monitor_templates soapenc:arrayType="xsd:string[1]" xsi:type="soapenc:Array">
                < item xsi:type="xsd:string">http< /item>
              < /monitor_templates>
            < /monitor_rule>
          < /item>
        < /item>
      < /monitor_associations>
    < /set_monitor_association>
  < /soap:Body>
< /soap:Envelope>

Hope this helps...