Make sure the user you are trying to log in as is, in fact, a "shell enabled" user. What you are describing sounds very much like that user is set up as being an ftp only user.
Go to the Control Panel Manage Users screen, and confirm (by looking in the "type" column) that the user is currently set to an "ftp" user, then click the "edit" link for the user, and change that user's settings to enable shell access for that user by clicking in the checkbox to enable shell/telnet access (and alternately select a shell from the "pull down" selection list) for that user.
You can also confirm your user/password combinations here.
Once the change has taken effect (you'll know when you no longer see the "clock" icon next to that user when visiting the page) you should be "good to go".