WinSCP relies on SSH code of PuTTY SSH client.
PuTTY does not support delayed compression (proprietary feature of OpenSSH, not standardized yet).
It is already covered by PuTTY wishlist item.

Using 3.8.2 on WinXP+SP2+fixes against Fedora Core 4 linux
which uses openssh-4.2p1 enabling compression in WinSCP does
not work after the systems are connected (X over zip icon in
status bar).

I looked at the openssh /etc/ssh/sshd_config file and saw that
compression by default was set to:

Compression delayed

Reading the manpage states that clients should negoiate compression
_after_ authenticating againt sshd. This does not seem to be
happening!

If I set the compression to:

Compression yes

Then WinSCP works fine (zip icon has no X over it in status line)
and transfers are noticabley faster.

SSH man page states this was a security problem therefore
the "delayed" was introduced so "yes" should not be used.

I hope that is enough debug info for the winscp developers.

Thanx

Iain