Disconnected: no supported authentication methods available

Try taking the group writeable permissions from your home directory:

chmod g-w ~/

Make your .ssh folder readable/writeable/executable only by you:

chmod 700 ~/.ssh

Make your authorized keys file readable/writeable only by you:

chmod 600 ~/.ssh/authorized_keys

That should remove the permissions errors.

Success!

All I had to do is change StrictModes to no.

Per section 3.14 in the OpenSSH FAQ and http://blogs.nullvision.com/?p=114 .

Wow.

Had a similar issue. When poking around I noticed that I had my home directories encrypted, and suspected that was the issue. I copied the authorized keys file to a directory outside of the encrypted home directory, changed the permissions appropriately (chmod 700 [dir], chmod 600 [dir]/authorized_keys, etc.).

Then edit your sshd_config to tell sshd of the new location for the authorized keys file, restart sshd, and that's it.

Seems to have fixed my problem.