As additional clarifications, the M-: has to happen with the cursor in
the *shell* buffer.  Before that, the password was read via the
minibuffer, without echoing (instead echoing periods for each
character).  This is emacs22-gtk on a fairly vanilla Gutsy installation.

-- 
comint-watch-for-password-prompt should be default
https://bugs.launchpad.net/bugs/162894
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