After you set up an account for public key authentication you will still have to enter a password the first time you log in. This is because when you set up public key authentication for an account and set the authentication type to Pwd OR Key, WinSSHD still must cache the password so that you can log in with just the public key. Therefore, on your first login attempt after you set up public key authentication, WinSSHD asks you for a password to store in the cache, even if your client already authenticated successfully using a public key. When this happens, just supply a valid password. When you log in after that, the password will be cached and you won't have to enter it again.