Stalled login [CentOS 3.6 OpenSSH_3.6.1p2]

Greetings,

I'm having issues with OpenSSH in my Linux Server, the specs are as follows:

CentOS 3.6
OpenSSH_3.6.1p2
Kernel 2.4.21-32.0.1ELsmp

The current issue that I'm having is, in order for sshd to work correctly I
have to boot my system in runlevel S and the activate network and ssh, if I
run it as level 3 it just stalls after I type in my password.

This is what I did to test this:

I stopped the sshd service: 
Service sshd stop

I switched to level 3
Telinit 3

I ran sshd with the debug flags (-D -ddd)

And tried to login opening a new terminal:

These are the last lines of the debug:

debug1: userauth-request for user root service ssh-connection method
password
debug1: attempt 2 failures 2
debug2: input_userauth_request: try method password
debug3: mm_auth_password entering
debug3: mm_request_send entering: type 10
debug3: mm_auth_password: waiting for MONITOR_ANS_AUTHPASSWORD
debug3: mm_request_receive_expect entering: type 11
debug3: mm_request_receive entering

On the terminal it says:
root@ip's password:


After I type the password it just stalls there.

I checked iptables rules and flushed them all, It would still stall on
debug3: mm_request_receive entering.

No messages at all on /var/log/secure and messages.

Thank you for any help on this subject.

Regards,
Damian Finol.