Luther dropped Augustine like a hot rock when he found that Augustine believed in a developing Righteousness (hence the Sacraments) as opposed to an imputed Righteousness which makes one immediatly saved.
There was a belief later in the early church that once you accepted the Lord Jesus as your savior you must live a perfect life. This brought confusion to some of the early church people because they quickly found out, even after accepting the Christ, it was impossible to live a perfect life. Up until this time nobody thought about this. Their focus had been on evangelism.
Augustine was the first to develop a comprehensive theology of the church including what it meant to be “righteous” and the meaning of the sacraments. For example, Augustine writes that many of them were afraid to be baptized because they felt it meant total commitment to a perfect life. Hence believers often waited until their death bed to be baptized (leading to the idea one could be sprinkled.) Of course this brought its own problems because some of them died before they could be baptized and, what was worst, some of them recovered which meant they had to live a perfect life-an impossible task.
There was also some confusion on the meaning of righteousness with the early church which is forgivable given the environment and culture; and given the fact many of these theological issues were still being worked out by the church. If you review the sacraments of the early church fathers you’ll find that, like righteousness, much of it was steeped in mysticism. The Catholics often point me back to the early church fathers writings on the sacraments but one has to understand what was going on in the church and their understanding. This is one (among many) of the reasons I don’t accept the Catholics interpretation of the sacraments and I’m a little more forgiving of Augustine on his understanding of righteousness.
Augustine’s writings are not inspired writing but provides us with the fundamental understanding of the western church monergystic theology. I don't have a problem with Luther's rejection for Augustine's interpretation of righteousness because it was a little weird. Augustine even admits having problems with his interpretation.