>>> # override default of no subsystems
>>> Subsystem       sftp    /usr/lib64/ssh/sftp-server

>> Is that the correct path?

> Locate thinks so. (it used to say /usr/lib/ssh/sftp-server when I found 
> that path didn't exist I changed it).
> Also sftp is asking for login and passwd. So I'm assuming that sftp is 
> up and running.

sftp doesn't do the passwd stuff, that is all handled by SSH core.

>> (But probably would get another error.)
>>
>> Is it executable for the user?
>>
> I'll check on this.
> 
>>  
>>
>>> Request for subsystem 'sftp' failed on channel 0
>>> Couldn't read packet: Connection reset by peer

Also check that sftp-server is able to find all the libs that it needs (check 
with ldd on it).
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