I think that the vulnerability which you pointed out is:

(1) Usually Client(Bob) can check whether he is really connected
    to the Server(Alice) by checking the Server's host key with
    the data which Bob has in the known_host directory. But in
    the very first connection to the Server, the host key is not
    installed yet. So in this occation Eve might BE ABLE to
    IMPERSONATE Alice by sending Eve's host key.

(2) If Eve pretends Alice Server, Bob would send his authentication
    information, which Eve receives and later she might use to login
    to Alice with Bob's account. Or Eve might forward the
    authentication information to Alice and send Eve's session key
    to both Bob and Alice.

====================
(1)'This MitM can be detected(avoided) in following ways:
(a) System Administrator tells the fingerprint of Alice's host
    key to Bob (either offline or through another trusted channel)
    and asks him to check the fingerprint shown on the console
    together with the initial alert message. -It is virtually
    impossible to forge a public-private key pair with the SAME
    fingerprint as Alice's pubkey.
(b) Bob's terminal be configured to reject all unknown hosts
    ("StricHostKeyChecking Yes"in the OpenSSH) and Alice's host key
    is supplied & installed offline.
However, (b) is rather burdensome and there are always sufficient number
of careless users, who overlook the fingerprint mismatch. Therefore
there is a chance for Eve to succeed in this attack.

(2)'If Eve succeeds in pretending Alice's node, Bob's account is
    stolen and the session is open to eavesdrop -as long as PASSWORD
    authentication is used in version 1. Therefore SSH(version 1)
    using password authentication is by NO MEANS secure shell.
    I have demonstrated this kind of MitM attack in a lecture.
    However, authentication using either RSA or DSA can avoid stealing
    the authentication information, because the authentication
    information(secret key) is not sent to the Server.
    It might be possible to just forward the authentication information
    to Alice and send Eve's session key to A & B, to make the session
    decryptable for EVE. But it is detected during the user
    authentication.

Therefore there are still a number of obstacles to Eve's perfect crime,
as long as RSA/DSA authentication is used. If password authentication is
unavoidable, at least protocol 1 be disabled. It is because most
(every?) MitM tools request protocol version 1 in establishing the
session. I am not sure whether protocol 2 detects that the
authentication process is eavesdropped.

-- 

                    Masahito Gotaishi, Researcher
                      R & D Initiative, Chuo University
                      1-13-27 Kasuga, Bunkyo, Japan, 112-8551
                      DDI:03-3817-1621, FAX:03-3817-1606

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