It sounds like Portuguese wine, but I think vas dao means don't kid yourself.
Am I right?

Vas dado is the correct spelling, but it may very well be pronounced the way you spelled it.

I think "don't kid yourself" works, but it seems a bit stronger to me, something more along the lines of "you're screwed."

I found one site that quoted Bart Simpson as saying, "Vas dado si lo haces, y si no lo haces vas dado." I'm sure you know how it is translated.

Did you hear this phrase used by a native speaker? I've never heard it to be honest.

It's a common one. It's so fast that it sound "vas dao" but it's "vas dado",as Rusty says
An example
You're in a very crowed bar.
You say "I'm gona order some beers"
your friend "Vas dado" (saying it will be imposible to you to go to the desk and find a waiter.

You see a pretty chick
You say "I'm gona ask her for a date"
Your friend "Vas dado" (She will laugh at you/ For her you're a worm)

A 15 year boy say to his sister
"I will ask mum to play Wii till 12.00 pm"
the sister "vas dado" (She will never allow it)

saludos :D

Thanks for the examples Sosia! :)

For all of the examples that Sosia gave, a good translation of vas dado would be fat chance!