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It shouldn't.
But since xterm access is in place, I'd suggest running the SSH daemon in foreground and debugging mode to see what's going on. Also, on the client side debug output would be useful to see in what stage of SSH handshake it breaks. For the OpenSSH client, hand it the "-vvv" switch and it will output verbose information (please don't copy verbatim in a post, at least use a Spoiler section here in the forum). The server would have to be killed and started again (or run a second instance on another port). The OpenSSH server knows about the "-d" flag and it will not go to background and report information.
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