I have seen this problem crop up on many Windows XP/2003 boxes:
If you install cygwin's sshd as a system service set to start automatically at startup you may run into problems. You may find that your connection will simply be reset, when you check on the service you will find it in a running/started state. The workaround is simple, launch cygwin's package manager and install the utility 'rebase'. Once you have the package installed shutdown all cygwin shells and sshd. Drop to the command prompt (start > run > cmd) and change to cygwin's bin directory (cd C:\cygwin\bin) and run:
That's it! Upon startup you will find that sshd is up and functioning properly.