Now I have to figure out what PUBLICKEY_UNRECOGNIZED means

According to the documentation it means that "The username/public key combination was invalid".
It's therefore a rather strange error - because you weren't even providing a "username/public key" combination.
Instead, you were providing a "username/password" combination.

However, that's the exact same error as I, too, experience when I try to authorize using auth_password. (As I mentioned in my previous post, I experience no problems if I seek authorization with auth_publickey.)
It has a very buggy feel about it, but I'm not sure what the bug is or whether it has been fixed in a more recent version of Net::SSH2 (I have version 0.63) or libssh2 (I have version 1.8.0).

Cheers,
Rob