I tried recreating this on Hardy Heron using nautilus version 2.21.90-0ubuntu1.
I took the following steps:
1) Launch nautilus
2) Go -> Location
3) Enter sftp://HOSTNAME
4) Prompted for password
5) Enter password
Then I was able to view files on the remote system. Since this bug is
fixed in Hardy I am changing the status to Fix Released.
** Changed in: nautilus (Ubuntu)
Status: Incomplete => Fix Released
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Can't connect to SFTP server
https://bugs.launchpad.net/bugs/178441
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