• Password login is possible (although disabled in the settings)
• Permission denied occurs when using public key authentication

When connecting to localhost:22, the following error occurs:

hikari@localhost: Permission denied (publickey,keyboard-interactive).

Cause

It appears that the Administrators group, i.e., "administrator users", is referencing the public key in C:\ProgramData\ssh\administrators_authorized_keys for authentication by default.

Change this to $env:userprofile\.ssh\authorized_keys.

Solution

Open C:\ProgramData\ssh\sshd_config with administrator privileges and comment out the following two lines:

- Match Group administrators
-       AuthorizedKeysFile __PROGRAMDATA__/ssh/administrators_authorized_keys
+ #Match Group administrators
+ #      AuthorizedKeysFile __PROGRAMDATA__/ssh/administrators_authorized_keys

After saving, restart the service.

Restart-Service sshd