I had this same problem, but I'm not using encrypted home directories. I did set my home directories permissions to 770 though. Moving the authorized keys to /etc/ssh/%u/authorized_keys worked.
Client: Ubuntu 9.04 Server: Ubuntu 9.04
I had this same problem, but I'm not using encrypted home directories. I did set my home directories permissions to 770 though. Moving the authorized keys to /etc/ssh/ %u/authorized_ keys worked.
Client: Ubuntu 9.04
Server: Ubuntu 9.04