If anyone is interested the fix to my problem was to set the MTU size to 1395 bytes

In order to find the appropriate MTU size open command prompt and type "ping ipaddress -f -l 1395" if you don't get a reply lower 1395 by 10 until you see your ping reply. Then set HKLM\SYSTEM\CurrentContolSet\Services\Tcpip\Parameters\Interfaces\ I had multiple interfaces that I needed to change the MTU size. Reboot and you should be able to use WinSCP.

Enjoy

By Relevant is this more of what you mean?

. 2010-08-04 08:29:40.451 --------------------------------------------------------------------------
. 2010-08-04 08:29:40.451 WinSCP Version 4.2.8 (Build 818) (OS 5.2.3790 Service Pack 2)
. 2010-08-04 08:29:40.451 Login time: Wednesday, August 04, 2010 8:29:40 AM
. 2010-08-04 08:29:40.451 --------------------------------------------------------------------------
. 2010-08-04 08:29:40.451 Session name: root@0.0.0.0
. 2010-08-04 08:29:40.451 Host name: 0.0.0.0 (Port: 2222)
. 2010-08-04 08:29:40.451 User name: root (Password: Yes, Key file: No)
. 2010-08-04 08:29:40.451 Tunnel: No
. 2010-08-04 08:29:40.451 Transfer Protocol: SFTP (SCP)
. 2010-08-04 08:29:40.451 Ping type: -, Ping interval: 30 sec; Timeout: 15 sec
. 2010-08-04 08:29:40.451 Proxy: none
. 2010-08-04 08:29:40.451 SSH protocol version: 2; Compression: No
. 2010-08-04 08:29:40.451 Bypass authentication: No
. 2010-08-04 08:29:40.451 Try agent: Yes; Agent forwarding: No; TIS/CryptoCard: No; KI: Yes; GSSAPI: No
. 2010-08-04 08:29:40.451 Ciphers: aes,blowfish,3des,WARN,arcfour,des; Ssh2DES: No
. 2010-08-04 08:29:40.451 SSH Bugs: -,-,-,-,-,-,-,-,-
. 2010-08-04 08:29:40.451 SFTP Bugs: -,-
. 2010-08-04 08:29:40.451 Return code variable: Autodetect; Lookup user groups: Yes
. 2010-08-04 08:29:40.451 Shell: default
. 2010-08-04 08:29:40.451 EOL: 0, UTF: 2
. 2010-08-04 08:29:40.451 Clear aliases: Yes, Unset nat.vars: Yes, Resolve symlinks: Yes
. 2010-08-04 08:29:40.451 LS: ls -la, Ign LS warn: Yes, Scp1 Comp: No
. 2010-08-04 08:29:40.451 Local directory: default, Remote directory: home, Update: No, Cache: Yes
. 2010-08-04 08:29:40.451 Cache directory changes: Yes, Permanent: Yes
. 2010-08-04 08:29:40.451 DST mode: 1
. 2010-08-04 08:29:40.451 --------------------------------------------------------------------------
. 2010-08-04 08:29:40.467 Looking up host "0.0.0.0"
. 2010-08-04 08:29:40.467 Connecting to 0.0.0.0 port 2222
. 2010-08-04 08:29:44.889 Selecting events 63 for socket 484
. 2010-08-04 08:29:44.889 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:44.889 Looking for incoming data
. 2010-08-04 08:29:44.889 Looking for network events
. 2010-08-04 08:29:44.889 Detected network event
. 2010-08-04 08:29:44.889 Enumerating network events for socket 484
. 2010-08-04 08:29:44.889 Enumerated 18 network events making 18 cumulative events for socket 484
. 2010-08-04 08:29:44.889 Handling network write event on socket 484 with error 0
. 2010-08-04 08:29:44.889 Handling network connect event on socket 484 with error 0
. 2010-08-04 08:29:44.889 Looking for network events
. 2010-08-04 08:29:45.155 Detected network event
. 2010-08-04 08:29:45.155 Enumerating network events for socket 484
. 2010-08-04 08:29:45.155 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:45.155 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:45.155 Server version: SSH-2.0-OpenSSH_5.0
. 2010-08-04 08:29:45.155 We believe remote version has SSH-2 ignore bug
. 2010-08-04 08:29:45.155 Using SSH protocol version 2
. 2010-08-04 08:29:45.155 We claim version: SSH-2.0-WinSCP_release_4.2.8
. 2010-08-04 08:29:45.155 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:45.155 Looking for incoming data
. 2010-08-04 08:29:45.155 Looking for network events
. 2010-08-04 08:29:45.530 Detected network event
. 2010-08-04 08:29:45.530 Enumerating network events for socket 484
. 2010-08-04 08:29:45.530 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:45.530 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:45.530 Doing Diffie-Hellman group exchange
. 2010-08-04 08:29:45.530 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:45.530 Looking for incoming data
. 2010-08-04 08:29:45.530 Looking for network events
. 2010-08-04 08:29:45.717 Detected network event
. 2010-08-04 08:29:45.717 Enumerating network events for socket 484
. 2010-08-04 08:29:45.717 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:45.717 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:45.717 Doing Diffie-Hellman key exchange with hash SHA-1
. 2010-08-04 08:29:45.795 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:45.795 Looking for incoming data
. 2010-08-04 08:29:45.795 Looking for network events
. 2010-08-04 08:29:47.249 Detected network event
. 2010-08-04 08:29:47.249 Enumerating network events for socket 484
. 2010-08-04 08:29:47.249 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:47.249 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:47.327 Selecting events 63 for socket 484
. 2010-08-04 08:29:47.327 Host key fingerprint is:
. 2010-08-04 08:29:47.327 ssh-rsa 2048 33:17:53:ca:0f:1c:7f:6a:2f:ce:0c:09:e7:5c:aa:71
. 2010-08-04 08:29:47.327 Initialised AES-256 SDCTR client->server encryption
. 2010-08-04 08:29:47.327 Initialised HMAC-SHA1 client->server MAC algorithm
. 2010-08-04 08:29:47.327 Initialised AES-256 SDCTR server->client encryption
. 2010-08-04 08:29:47.327 Initialised HMAC-SHA1 server->client MAC algorithm
. 2010-08-04 08:29:47.327 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:47.327 Looking for incoming data
. 2010-08-04 08:29:47.327 Looking for network events
. 2010-08-04 08:29:47.624 Detected network event
. 2010-08-04 08:29:47.624 Enumerating network events for socket 484
. 2010-08-04 08:29:47.624 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:47.624 Handling network read event on socket 484 with error 0
! 2010-08-04 08:29:47.624 Using username "root".
. 2010-08-04 08:29:47.624 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:47.624 Looking for incoming data
. 2010-08-04 08:29:47.624 Looking for network events
. 2010-08-04 08:29:47.811 Detected network event
. 2010-08-04 08:29:47.811 Enumerating network events for socket 484
. 2010-08-04 08:29:47.811 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:47.811 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:47.811 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:47.811 Looking for incoming data
. 2010-08-04 08:29:47.811 Looking for network events
. 2010-08-04 08:29:47.967 Detected network event
. 2010-08-04 08:29:47.967 Enumerating network events for socket 484
. 2010-08-04 08:29:47.967 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:47.967 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:47.967 Keyboard-interactive authentication refused
. 2010-08-04 08:29:47.967 Prompt (6, SSH password, , &Password: )
. 2010-08-04 08:29:47.967 Using stored password.
. 2010-08-04 08:29:47.967 Sent password
. 2010-08-04 08:29:47.967 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:47.967 Looking for incoming data
. 2010-08-04 08:29:47.967 Looking for network events
. 2010-08-04 08:29:48.139 Detected network event
. 2010-08-04 08:29:48.139 Enumerating network events for socket 484
. 2010-08-04 08:29:48.139 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:48.139 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:48.139 Access granted
. 2010-08-04 08:29:48.139 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:48.139 Looking for incoming data
. 2010-08-04 08:29:48.139 Looking for network events
. 2010-08-04 08:29:48.280 Detected network event
. 2010-08-04 08:29:48.280 Enumerating network events for socket 484
. 2010-08-04 08:29:48.280 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:48.280 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:48.280 Opened channel for session
. 2010-08-04 08:29:48.280 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:48.280 Looking for incoming data
. 2010-08-04 08:29:48.280 Looking for network events
. 2010-08-04 08:29:48.639 Detected network event
. 2010-08-04 08:29:48.639 Enumerating network events for socket 484
. 2010-08-04 08:29:48.639 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:48.639 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:48.639 Primary command failed; attempting fallback
. 2010-08-04 08:29:48.639 Waiting for the server to continue with the initialisation
. 2010-08-04 08:29:48.639 Looking for incoming data
. 2010-08-04 08:29:48.639 Looking for network events
. 2010-08-04 08:29:48.796 Detected network event
. 2010-08-04 08:29:48.796 Enumerating network events for socket 484
. 2010-08-04 08:29:48.796 Enumerated 1 network events making 1 cumulative events for socket 484
. 2010-08-04 08:29:48.796 Handling network read event on socket 484 with error 0
. 2010-08-04 08:29:48.796 Started a shell/command
. 2010-08-04 08:29:48.796 --------------------------------------------------------------------------
. 2010-08-04 08:29:48.796 Using SCP protocol.
. 2010-08-04 08:29:48.796 Doing startup conversation with host.
. 2010-08-04 08:29:48.796 Skipping host startup message (if any).
. 2010-08-04 08:29:48.796 Sent 36 bytes
. 2010-08-04 08:29:48.796 There are 0 bytes remaining in the send buffer
. 2010-08-04 08:29:48.796 Looking for network events
. 2010-08-04 08:29:48.796 Timeout waiting for network events
. 2010-08-04 08:29:48.796 Sent 1 bytes
. 2010-08-04 08:29:48.796 There are 0 bytes remaining in the send buffer
. 2010-08-04 08:29:48.796 Looking for network events
. 2010-08-04 08:29:48.796 Timeout waiting for network events
> 2010-08-04 08:29:48.796 echo "WinSCP: this is end-of-file:0"
. 2010-08-04 08:29:48.796 Waiting for another 1 bytes
. 2010-08-04 08:29:48.796 Looking for incoming data
. 2010-08-04 08:29:48.796 Looking for network events
. 2010-08-04 08:30:03.796 Timeout waiting for network events
. 2010-08-04 08:30:03.796 Waiting for data timed out, asking user what to do.
. 2010-08-04 08:30:03.796 Asking user:
. 2010-08-04 08:30:03.796 Host is not communicating for 15 seconds.
. 2010-08-04 08:30:03.796
. 2010-08-04 08:30:03.796 Wait for another 15 seconds? ()
. 2010-08-04 08:30:04.312 Pooling for data in case they finally arrives
. 2010-08-04 08:30:04.312 Looking for network events
. 2010-08-04 08:30:04.312 Timeout waiting for network events
. 2010-08-04 08:30:04.812 Pooling for data in case they finally arrives
. 2010-08-04 08:30:04.812 Looking for network events
. 2010-08-04 08:30:04.812 Timeout waiting for network events
. 2010-08-04 08:30:05.015 Attempt to close connection due to fatal exception:
* 2010-08-04 08:30:05.015 Terminated by user.
. 2010-08-04 08:30:05.015 Closing connection.
. 2010-08-04 08:30:05.015 Sending special code: 12
. 2010-08-04 08:30:05.015 Sent EOF message
. 2010-08-04 08:30:05.015 Selecting events 0 for socket 484
* 2010-08-04 08:30:05.015 (ESshFatal) Terminated by user.
* 2010-08-04 08:30:05.015 Error skipping startup message. Your shell is probably incompatible with the application (BASH is recommended).

Can you post a relevant entries of the SSH server log?

WinSCP Version 4.2.8(Build 818)
Windows XP on virtual server
Error occurs on all transfer protocols
Error occurs on gui and scripting/automation
Your Shell is probably incompatible with the application (BASH recommended)
Script:

@echo off
echo Generate temporary script to upload files
echo option batch on > script.tmp
echo option confirm off >> script.tmp
::************* Comment ********************::
:: open session using second parameter as
:: password and first parameter as host
::
:: Syntax: open username:password@host:port
::******************************************::
echo open root:%2@%1:2222 >> script.tmp
echo cd /root >> script.tmp
::************* Comment ********************::
:: loop to put all files passed as
:: third parameter or higher onto
:: the Grid Router
::******************************************::

:Loop
if [%3]==[] goto LoopEnd
echo put %3 >> script.tmp
::************** Comment *****************::
:: shifts the parameters to the left until
:: no more left.
::****************************************::
shift
goto Loop

:LoopEnd

echo exit >> script.tmp

color 2f
echo Executing script
winscp.exe /script=script.tmp

color
if %ERRORLEVEL% NEQ 0 echo ERROR!

echo Delete temporary script
del script.tmp
pause

Log: (IP address is not include erased for security purposes)

<?xml version="1.0" encoding="UTF-8"?>
<session xmlns="https://winscp.net/schema/session/1.0" name="root@10.149.239.17" start="2010-08-03T20:42:27.757Z">
</session>
. 2010-08-03 17:43:38.835 --------------------------------------------------------------------------
. 2010-08-03 17:43:38.835 WinSCP Version 4.2.8 (Build 818) (OS 5.2.3790 Service Pack 2)
. 2010-08-03 17:43:38.835 Login time: Tuesday, August 03, 2010 5:43:38 PM
. 2010-08-03 17:43:38.835 --------------------------------------------------------------------------
. 2010-08-03 17:43:38.835 Session name: root@0.0.0.0
. 2010-08-03 17:43:38.835 Host name: 0.0.0.0 (Port: 2222)
. 2010-08-03 17:43:38.835 User name: root (Password: Yes, Key file: No)
. 2010-08-03 17:43:38.835 Tunnel: No
. 2010-08-03 17:43:38.835 Transfer Protocol: SFTP (SCP)
. 2010-08-03 17:43:38.835 Ping type: -, Ping interval: 30 sec; Timeout: 15 sec
. 2010-08-03 17:43:38.835 Proxy: none
. 2010-08-03 17:43:38.835 SSH protocol version: 2; Compression: No
. 2010-08-03 17:43:38.835 Bypass authentication: No
. 2010-08-03 17:43:38.835 Try agent: Yes; Agent forwarding: No; TIS/CryptoCard: No; KI: Yes; GSSAPI: No
. 2010-08-03 17:43:38.835 Ciphers: aes,blowfish,3des,WARN,arcfour,des; Ssh2DES: No
. 2010-08-03 17:43:38.835 SSH Bugs: -,-,-,-,-,-,-,-,-
. 2010-08-03 17:43:38.835 SFTP Bugs: -,-
. 2010-08-03 17:43:38.835 Return code variable: Autodetect; Lookup user groups: Yes
. 2010-08-03 17:43:38.835 Shell: default
. 2010-08-03 17:43:38.835 EOL: 0, UTF: 2
. 2010-08-03 17:43:38.835 Clear aliases: Yes, Unset nat.vars: Yes, Resolve symlinks: Yes
. 2010-08-03 17:43:38.835 LS: ls -la, Ign LS warn: Yes, Scp1 Comp: No
. 2010-08-03 17:43:38.835 Local directory: default, Remote directory: home, Update: No, Cache: Yes
. 2010-08-03 17:43:38.835 Cache directory changes: Yes, Permanent: Yes
. 2010-08-03 17:43:38.835 DST mode: 1
. 2010-08-03 17:43:38.835 --------------------------------------------------------------------------
. 2010-08-03 17:43:38.851 Looking up host "0.0.0.0"
. 2010-08-03 17:43:38.851 Connecting to 0.0.0.0 port 2222
. 2010-08-03 17:43:39.273 Server version: SSH-2.0-OpenSSH_5.0
. 2010-08-03 17:43:39.273 We believe remote version has SSH-2 ignore bug
. 2010-08-03 17:43:39.273 Using SSH protocol version 2
. 2010-08-03 17:43:39.273 We claim version: SSH-2.0-WinSCP_release_4.2.8
. 2010-08-03 17:43:39.491 Doing Diffie-Hellman group exchange
. 2010-08-03 17:43:39.788 Doing Diffie-Hellman key exchange with hash SHA-1
. 2010-08-03 17:43:41.413 Host key fingerprint is:
. 2010-08-03 17:43:41.413 ssh-rsa 2048 33:17:53:ca:0f:1c:7f:6a:2f:ce:0c:09:e7:5c:aa:71
. 2010-08-03 17:43:41.413 Initialised AES-256 SDCTR client->server encryption
. 2010-08-03 17:43:41.413 Initialised HMAC-SHA1 client->server MAC algorithm
. 2010-08-03 17:43:41.413 Initialised AES-256 SDCTR server->client encryption
. 2010-08-03 17:43:41.413 Initialised HMAC-SHA1 server->client MAC algorithm
! 2010-08-03 17:43:41.694 Using username "root".
. 2010-08-03 17:43:42.023 Keyboard-interactive authentication refused
. 2010-08-03 17:43:42.023 Prompt (6, SSH password, , &Password: )
. 2010-08-03 17:43:42.023 Using stored password.
. 2010-08-03 17:43:42.023 Sent password
. 2010-08-03 17:43:42.163 Access granted
. 2010-08-03 17:43:42.319 Opened channel for session
. 2010-08-03 17:43:42.648 Primary command failed; attempting fallback
. 2010-08-03 17:43:42.819 Started a shell/command
. 2010-08-03 17:43:42.819 --------------------------------------------------------------------------
. 2010-08-03 17:43:42.819 Using SCP protocol.
. 2010-08-03 17:43:42.819 Doing startup conversation with host.
. 2010-08-03 17:43:42.819 Skipping host startup message (if any).
> 2010-08-03 17:43:42.819 echo "WinSCP: this is end-of-file:0"
. 2010-08-03 17:43:57.819 Waiting for data timed out, asking user what to do.
. 2010-08-03 17:43:57.819 Asking user:
. 2010-08-03 17:43:57.819 Host is not communicating for 15 seconds.
. 2010-08-03 17:43:57.819
. 2010-08-03 17:43:57.819 Wait for another 15 seconds? ()
. 2010-08-03 17:43:59.757 Attempt to close connection due to fatal exception:
* 2010-08-03 17:43:59.757 Terminated by user.
. 2010-08-03 17:43:59.757 Closing connection.
. 2010-08-03 17:43:59.757 Sending special code: 12
. 2010-08-03 17:43:59.757 Sent EOF message
* 2010-08-03 17:43:59.757 (ESshFatal) Terminated by user.
* 2010-08-03 17:43:59.757 Error skipping startup message. Your shell is probably incompatible with the application (BASH is recommended).

I do not understand why I'm getting this error on my virtual machine but not on my PC. I've set my MTU size to 1395 where the ping is responing using "ping ipaddress -f -l 1395" thats what I saw from my research online. I'm clueless now as to the fix to this problem.

Thanks, for any suggestions