After creating the instance, I can login using gcutil or ssh. I tried copy/paste from the ssh link listed at the bottom of the instance and get the same error message.
Ensure that the permissions on your home directory and on the home directory of the user on the host you're connecting to are set to 700 ( owning user rwx only to prevent others seeing the .ssh subdirectory ).
Then ensure that the ~/.ssh directory is also 700 ( user rwx ) and that the authorized_keys is 600 ( user rw ) .
Private keys in your ~/.ssh directory should be 600 or 400 ( user rw or user r )