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.
I just experienced a similar message [ mine was "Permission denied (publickey)"] after connecting to a compute engine VM which I just created. After reading this post, I decided to try it again.
That time it worked. So i see 3 possible reasons for it working the second time,
I suspect the last is unlikely :)