The symptoms vary across OS’s and connection utilities/programs but in essence it’s the same. Connecting to a remote filesystem via SSH fails with no good error message. Transmit on Mac mounting the drive is no better than Nautilus on Linux or Dokan on Windows. SCP and SSHFS are just as bad.
The issue often is there is an unexpected return (non-zero error code) that the client program doesn’t know what to do with, and causes client to fail.
Attempting to SSHFS results in “remote host has disconnected” while Nautilus spits out its usual useless, non-constructive error message on failure..
In a terminal, check whether anything gets returned upon an /usr/bin/false login. Maybe a .bashrc, .profile or .cshrc is replying with a warning or error message that SSHFS/SCP/Transmit/Nautilus/etc don’t understand and causes them to break.