The error you are seeing comes from SSH. I'd check what user is running the process, and that you can connect without password challenge using that user.
You can also turn up the verbosity of a SSH connection to see what's going on as you try to connect. In PuTTY, you can monitor what's going on by looking at the "event log" by selecting in the upper left hand corner of the window while you are opening the connection.
If you are trying to call PuTTY from within MATLAB, you could also try using plink (which is another part of the PuTTY suite of tools)
Beyond that, more information is required -- for instance a short code sample that illustrates the problem.
And, as a shameless plug -- the Parallel Computing Toolbox and MATLAB Distributed Computing Server let you set up a remote machine, connect via a client and run MATLAB remotely.
