I'm way out of my league now, so this is just speculation on my part.
But did your test sftp go to the same site and user at that site? I just
wonder if it is possible if the problem is at the far end. I really
don't know, I'm just musing out loud. 

I am at home on my Linux system. Where I have a full OpenSSH setup. I
set up two ids for testing. Call them "local" and "remote" for fun. I
created a ssh key using "local". I put the public key in remote's .ssh
authorized_keys file. I could then do an sftp connection from local to
remote. But if I changed the filemode on remote's .ssh to other than
700, I could not use the cert (it asked for the UNIX password). Also, if
I changed the authorized_keys file in remote's .ssh subdirectory to
where anyone other than the user had write access to it, I could not use
the digital cert, but was prompted for the password. Now, if I disable
the use of passwords in /etc/ssh/sshd_config, then I cannot connect at
all.

What I'm getting at is that I __think__ there __might__ be a problem on
the far end for one of the ssh files.

On Tue, 2010-11-30 at 17:58 -0500, Leonard Sasso wrote:
> Changed the directory and file permissions, received the same error 
> messages.
> 
> 
> Thank You.
> 
> Len Sasso
> 
> 
> 
> RDC Operations - Systems Administrator
> CSC
> Information Technology Infrastructure Services (ITIS)
> | p: 518.257-4209 | m: 518.894-0879 | f: 518.257-4300 | [email protected] | 
> www.csc.com
> 
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> 
> From:
> Kirk Wolf <[email protected]>
> To:
> [email protected]
> Date:
> 11/30/2010 05:25 PM
> Subject:
> Re: "FOTS1346 Permission denied, please try again"
> 
> 
> 
> Gil is correct.  Even though you aren't using keys, OpenSSH will try to
> cache a prng in .ssh, so it should be 700.
> 
> Best to stay with these recommendations for file permissions:
>   http://dovetail.com/docs/sftp/sftp-webinar.pdf  slide 29  "Common
> Pitfalls"
> 
> Kirk Wolf
> Dovetailed Technologies
> http://dovetail.com
> 
> On Tue, Nov 30, 2010 at 4:09 PM, Paul Gilmartin 
> <[email protected]>wrote:
> 
> > On Tue, 30 Nov 2010 16:32:48 -0500, Leonard Sasso wrote:
> >
> > >Does the production RACF id have an OMVS segment?  Yes
> > >Does it have a HOME subdirectory?  Yes
> > >Is there a .ssh subdirectory in the $HOME for this user?  Yes
> > >Is the UNIX filemode for .ssh subdirectory set to 700 or 600?  Set to 
> 770
> > >Are the files in the .ssh subdirectory all set to filemode 600?  Set to
> > >600 or 644 or 777
> > >Is .ssh and all its files owned by the production RACF id?  Yes
> > >
> > Those might be too permissive.  "For your protection" some
> > variants of SSL/SSH prohibit that any files in ~/.ssh, and
> > any directories in its path, be group writeable.  Stay with
> > 700 for directories and 600 for basefiles.
> >
> > -- gil
> >
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Maranatha! <><

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