Can't connect to local machine using ssh

[Micha Feigin <michf@post.tau.ac.il>]

I installed openssh server and client but I still can't connect to the local
machine, neither remotely or localy

ssh localhost
The authenticity of host 'localhost (127.0.0.1)' can't be established.
RSA key fingerprint is 86:df:53:2d:84:7e:e9:f4:8e:f8:06:ac:73:1b:05:f3.
Are you sure you want to continue connecting (yes/no)? yes
Warning: Permanently added 'localhost' (RSA) to the list of known hosts.
micha@localhost's password: 
Connection closed by 127.0.0.1

I think that I enabled password login in /etc/ssh/sshd_config but I may have
missed it. If it makes a difference, its a thinkpad with fingerprint reader
enabled which works for local login but also with a password

thanks