I solved this issue using help from:
https://help.ubuntu.com/community/SSH/OpenSSH/Keys

Encrypted Home Directory was my issue. and it was file permission issue.

Also I needed to run "gpg-agent --daemon --enable-ssh-support"
explicitly. Though it was part of yubikey Ubuntu script from here
https://developers.yubico.com/PGP/SSH_authentication/

I just ran script again and again and fixed file permissions. Somehow it
started working and allowed me to login.

Using Ubuntu 16.04.02.
Yubikey 4 nano

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https://bugs.launchpad.net/bugs/1569019

Title:
  rsa ssh login fails with "sign_and_send_pubkey: signing failed: agent
  refused operation" error

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