This seems to be working as expected here (same version of ssh on a fully up-to-date sarge box), regardless of the X11UseLocalhost setting. If you'd be so kind as to post a copy of /etc/ssh/sshd_config, I'll compare it against mine and try to determine if there are any relevant differences. It might be helpful to include a copy of /etc/pam.d/ssh as well.
Attachment:
signature.asc
Description: Digital signature