Linux Xen Debian lenny upgrade
If you’re just upgrading your Xen-domU to lenny and the new lenny-standard-kernel, you might end up with a broken system, where ssh returns PTY allocation request failed on channel 0.
This is probably also true for other system, it seems that lenny mounts /dev/pts via udev, while etch had some /etc/init.d/-fallback.
Try installing udev.