I have configured sshd to accept key-based ssh logins with LogLevel on DEBUG, and uploaded my public key to ~/.ssh.authorized_keys, where permissions are set as:

700 ~/.ssh 600 ~/.ssh/authorized_keys

From root, I can su - USERNAME. From the client I get Permission denied (publicly). From the server Here's how it is telling me that it "Could not open authorized keys '/home/USERNAME/.ssh/authorized_keys': Permission denied".

    Client protocol version 2.0; client software version OpenSSH_5.2
    match: OpenSSH_5.2 pat OpenSSH*
    Enabling compatibility mode for protocol 2.0
    Local version string SSH-2.0-OpenSSH_5.9p1 Debian-5ubuntu1
    permanently_set_uid: 105/65534 [preauth]
    list_hostkey_types: ssh-rsa,ssh-dss,ecdsa-sha2-nistp256 [preauth]
    SSH2_MSG_KEXINIT sent [preauth]
    SSH2_MSG_KEXINIT received [preauth]
    kex: client->server aes128-ctr hmac-md5 none [preauth]
    kex: server->client aes128-ctr hmac-md5 none [preauth]
    SSH2_MSG_KEX_DH_GEX_REQUEST received [preauth]
    SSH2_MSG_KEX_DH_GEX_GROUP sent [preauth]
    expecting SSH2_MSG_KEX_DH_GEX_INIT [preauth]
    SSH2_MSG_KEX_DH_GEX_REPLY sent [preauth]
    SSH2_MSG_NEWKEYS sent [preauth]
    expecting SSH2_MSG_NEWKEYS [preauth]
    SSH2_MSG_NEWKEYS received [preauth]
    KEX done [preauth]
    userauth-request for user USERNAME service ssh-connection method none [preauth]
    attempt 0 failures 0 [preauth]
    PAM: initializing for "USERNAME"
    PAM: setting PAM_RHOST to "USERHOSTNAME"
    PAM: setting PAM_TTY to "ssh"
    userauth_send_banner: sent [preauth]
    userauth-request for user USERNAME service ssh-connection method publickey [preauth]
    attempt 1 failures 0 [preauth]
    test whether pkalg/pkblob are acceptable [preauth]
    Checking blacklist file /usr/share/ssh/blacklist.RSA-4096
    Checking blacklist file /etc/ssh/blacklist.RSA-4096
    temporarily_use_uid: 1001/1002 (e=0/0)
    trying public key file /home/USERNAME/.ssh/authorized_keys
    Could not open authorized keys '/home/USERNAME/.ssh/authorized_keys': Permission denied
    restore_uid: 0/0
    temporarily_use_uid: 1001/1002 (e=0/0)
    trying public key file /home/USERNAME/.ssh/authorized_keys2
    Could not open authorized keys '/home/USERNAME/.ssh/authorized_keys2': Permission denied
    restore_uid: 0/0
    Failed publickey for USERNAME from IPADDRESS port 57523 ssh2
    Connection closed by IPADDRESS [preauth]
    do_cleanup [preauth]
    monitor_read_log: child log fd closed
    do_cleanup
    PAM: cleanup