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Fatal: unable to initialise SFTP on server: could not connect

Subject: Fatal: unable to initialise SFTP on server: could not connect
Date: Tue, 10 Jul 2007 20:04:54 -0700 (PDT)

Hi, 

I have sshd and sftp running on my remote linux box. But when I tried to
sftp from my desktop into any domains on the server I get the following
error:

Fatal: unable to initialise SFTP: could not connect

I have tried several different sftp clients and no luck.  I consulted some
FAQs on openssh.com and the problem maybe in my sftp shell initialization. 

This is from openssh.com: <<sftp and/or scp may fail at connection time if
you have shell initialization (.profile, .bashrc, .cshrc, etc) which
produces output for non-interactive sessions. This output confuses the
sftp/scp client.>>

Does anyone know how I can modify my shell initialization to allow sftp to
connect?
As i said sftp is running from within the server which has got me even more
confused. 
Below is the contents of my sshd_config. Any help is greatly appreciated. 

#       $OpenBSD: sshd_config,v 1.59 2002/09/25 11:17:16 markus Exp $

# This is the sshd server system-wide configuration file.  See
# sshd_config(5) for more information.

# This sshd was compiled with PATH=/usr/local/bin:/bin:/usr/bin

# The strategy used for options in the default sshd_config shipped with
# OpenSSH is to specify options with their default value where
# possible, but leave them commented.  Uncommented options change a
# default value.

Port 22
Protocol 2
#ListenAddress 0.0.0.0
#ListenAddress ::

# HostKey for protocol version 1
#HostKey /etc/ssh/ssh_host_key
# HostKeys for protocol version 2
#HostKey /etc/ssh/ssh_host_rsa_key
#HostKey /etc/ssh/ssh_host_dsa_key

# Lifetime and size of ephemeral version 1 server key
#KeyRegenerationInterval 3600
#ServerKeyBits 768

# Logging
#obsoletes QuietMode and FascistLogging
#SyslogFacility AUTH
SyslogFacility AUTHPRIV
#LogLevel INFO

# Authentication:

#LoginGraceTime 120
PermitRootLogin no
StrictModes yes

#RSAAuthentication yes
#PubkeyAuthentication yes
#AuthorizedKeysFile     .ssh/authorized_keys

# rhosts authentication should not be used
#RhostsAuthentication no
# Don't read the user's ~/.rhosts and ~/.shosts files
#IgnoreRhosts yes
# For this to work you will also need host keys in /etc/ssh/ssh_known_hosts
#RhostsRSAAuthentication no
# similar for protocol version 2
#HostbasedAuthentication no
# Change to yes if you don't trust ~/.ssh/known_hosts for
# RhostsRSAAuthentication and HostbasedAuthentication
#IgnoreUserKnownHosts no

# To disable tunneled clear text passwords, change to no here!
#PasswordAuthentication yes
#PermitEmptyPasswords no

# Change to no to disable s/key passwords
#ChallengeResponseAuthentication yes

# Kerberos options
#KerberosAuthentication no
#KerberosOrLocalPasswd yes
#KerberosTicketCleanup yes

#AFSTokenPassing no

# Kerberos TGT Passing only works with the AFS kaserver
#KerberosTgtPassing no

# Set this to 'yes' to enable PAM keyboard-interactive authentication
# Warning: enabling this may bypass the setting of 'PasswordAuthentication'
#PAMAuthenticationViaKbdInt no

#X11Forwarding no
X11Forwarding no
#X11DisplayOffset 10
#X11UseLocalhost yes
PrintMotd yes
PrintLastLog yes
#KeepAlive yes
#UseLogin no
#UsePrivilegeSeparation yes
#PermitUserEnvironment no
#Compression yes

#MaxStartups 10
# no default banner path
#Banner /some/path
#VerifyReverseMapping no

# override default of no subsystems
Subsystem       sftp    /usr/libexec/openssh/sftp-server

DenyUsers root
DenyGroups root

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