PublicKey authentication fails because of onerous permission rules

The required permissions are now too strict. It is not possible to login using the PublicKey method if the home directory is group readable.

WHAT I DID

Install openssh-server and openssh-client. Create a new account. Login to the account and create a PublicKey

    ssh-keygen -t rsa

Copy the PublicKey to the authorized keys list

    cat ~/.ssh/id_rsa.pub > .ssh/authorized_keys

Set the permissions along the path

    chmod u+rwx,go-rwx ~/
    chmod u+rwx,go-rwx ~/.ssh
    chmod u+rw,go-rwx ~/.ssh/authorized_keys

Start the ssh authentication agent, and add the new key

    eval `/usr/bin/ssh-agent -s`
    ssh-add

Login to the account via ssh

    ssh -vv localhost

Logout.

WHAT HAPPENS

Everything works as expected

WHAT I DID NEXT

Change the permission on just the home folder.

    chmod g+rwx ~/

Login to the account via ssh

    ssh -vv localhost

WHAT I EXPECTED

Login should still work. It does in jaunty, and the FILES section of the ssh man page makes no mention of restrictions on the home directory. In fact, it talks about permissions on .ssh, which makes no sense if the home directory is already more restricted.

WHAT HAPPENS

PublicKey authentication fails. The reason is given in /var/log/authlog as the wrong permissions on the home directory.