Ssh_config changes not taking effect

Using sudo on the open command doesn't do anything particularly useful -- the actual program still gets run under the user's regular identity. To solve this, make sure TextEdit isn't running, then do:

sudo /Applications/TextEdit.app/Contents/MacOS/TextEdit &
open -a "TextEdit" /etc/sshd_config

The first command runs TextEdit as root; the second tells it to open the file. After this, you should be able to edit & save changes. When you're done, be sure to quit TextEdit (or it'll keep editing files as root).

Alternately, use TextWrangler (or its even-more-capable-but-not-free sibling, BBEdit). It handles saving files as root automatically, as well as having easy ways to edit invisible files. I much prefer it for editing config files and the like.

EDIT: Be sure to get the version of TextWrangler from the Bare Bones Software web site, not the version from the Mac App Store -- the App Store version has the save-as-root feature removed to comply with Apple's rules.

I had the same problem and found the answer here: Mavericks update broke ssh key-based authentication

Basically, you can't use authorized_keys2 anymore (an old default). Rename the file to "authorized_keys" and it should work again (it did so for me).

mv ~/.ssh/authorized_keys2 ~/.ssh/authorized_keys