openssh unix dev - Jun 2001 - behaviour of sshd in debug mode

Hi,
 I tried searching openssh docs and the archives but could not get much info
on this problem i am facing with openssh.

When i run the sshd on the remote machine(OpenSSH_2.9p1) in debug mode and
try to login from local host(OpenSSH_2.3.0), I get into the remote host with
public key authnetication.But if i run sshd without debug mode, I am
prompted for passwrod authentication and eventhough i give the correct
password I am refused connection.

Pls can someone tell me if i am missing something...

Thanks for any help,
Deepa.