Please: did you ever find the answer? I’ve had the same exact problems, except it was working for like an hour, and then, bam. Critical errors, etc., yaddah yaddah, what you said. I tried changing passwords, changing account types (FTP, SFTP, shell), none of that worked. (I can, however, log-on using WebFTP). ?!?!?!?
I had the same issue as the OP and the person who said theirs did not get fixed with a changed password. I used both yourdomain.com and ftp.yourdomain.com and neither worked.
The one time I did get it to work for a short while before things just stopped working (it was like an hour of transferring files fine, and then, it stopped), I used the computer name grenadilla.dreamhost.com. I tried that, again, too…no luck.