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PuTTY reports "Incoming packet was garbled on decryption" when connecting to versions of OpenSSH before 4.6p1 built against OpenSSL 0.9.8e. This is caused by a bug in OpenSSL 0.9.8e, and is not specific to PuTTY -- configuring an unaffected version of OpenSSH to use the same ciphers as PuTTY gives a similar result.
This bug is in OpenSSH's Bugzilla as Bug 1291. It is fixed in OpenSSL CVS and there is a workaround in OpenSSH 4.6p1.
For those people forced to run an older OpenSSH and OpenSSL 0.9.8e, the best workaround is to configure sshd not to offer the "aes256-ctr", "aes192-ctr", or "arcfour256" ciphers. Failing that, configure PuTTY to prefer either triple-DES or Blowfish to AES and Arcfour.
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