Ive been unable to get a SSH2 connection with compression on my WindowsXP/2003 boxes using SSH clients Putty and WinSCP to my Gentoo development machine (gendesk). The changes I had made recently update to OpenSSH_4.2p1 (OpenSSL 0.9.7e).
OpenSSH 4.2 has a "Compression delayed" option in /etc/ssh/sshd_config which protects the zlib (compression) library until authentification has been achived. Putty doesn't support "Compression delayed" option and ssh clients that use Putty code such as WinSCP will have teh same problem.
Change "Compression delayed" option to "Compression yes" in /etc/ssh/sshd_config.