SFTP with SSH key: No supported authentication methods available

If I configure an SFTP-only user, that will connect via SFTP and public key to a jailed (chroot'ed) directory, then the user is denied access. I see the following error in the log.

# tail /var/log/auth.log
Mar 24 23:40:05 wopr sshd[11628]: user joshua login class [preauth]
Mar 24 23:40:05 wopr syslogd: last message repeated 1 times
Mar 24 23:40:05 wopr sshd[11628]: error: Received disconnect from 123.123.123.123 port 53779:14: No supported authentication methods available [preauth]
Mar 24 23:40:05 wopr sshd[11628]: Disconnected from authenticating user joshua 123.123.123.123 port 53779 [preauth]


The server uses the SFTP subsystem of the default OpenSSH. I read posts, that suggest wrong user name in SFTP client, wrong public key or incorrect permissions for user directory or SSH key directory. However, all these areas seem to be correct and works fine for other system users. The same public key works for SSH to other servers. Any suggestions to causes of this error?
 
The error is only impacting jailed system users, that will use the SFTP subsystem of the default OpenSSH in FreeBSD. If the error is related to permissions, I would expect a permission error from OpenSSH, but the error message does mention "pubkey", which is in fact the method, that is being used.
 
It's not going to be a permissions issue because I would think the the problem is that the jail simply can't see the files necessary.
 
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