Ubuntu – X11 forwarding broken

I cant for the life of me get x11forwarding to work. I did everything 'by the book'…
Both client and server is running ubuntu 11.04. Both have ssh, vnc, x11 and FW ports open

/etc/ssh/ssh_config

   ForwardAgent yes
   ForwardX11 yes
   ForwardX11Trusted yes

/etc/ssh/sshd_config

X11Forwarding yes
X11DisplayOffset 10

apt-get install xauth
xauth is already the newest version.

• installed tightvncserver
• ran xauth list
• rebooted
• connected with ssh server -Xvl user

echo $DISPLAY return blank
xterm returns xterm Xt error: Can't open display:

xterm:  DISPLAY is not set

• FW is open
• VNCserver running
• sshd running
• X11 running
• ssh config files ok
• verbose output from ssh login shows all ok, no errors

Still nothing works…

So i did export DISPLAY=localhost:10.0
Then echo $DISPLAY returns localhost:10.0 but xterm returns xterm Xt error: Can't open display: localhost:10.0

Now here's the weird part. if i do export DISPLAY=:0.0 then xterm gives no error, but no GUI is displayed…

Tried everything except reinstalling the OS. Even reinstalled ssh and copied fresh config files from a working install…

Putting here the verbose output:

user@jupiter:~$ ssh -v -X user@192.168.0.1 env
OpenSSH_5.8p1 Debian-1ubuntu3, OpenSSL 0.9.8o 01 Jun 2010
debug1: Reading configuration data /etc/ssh/ssh_config
debug1: Applying options for *
debug1: Connecting to 192.168.0.1 [192.168.0.1] port 22.
debug1: Connection established.
debug1: identity file /home/user/.ssh/id_rsa type -1
debug1: identity file /home/user/.ssh/id_rsa-cert type -1
debug1: identity file /home/user/.ssh/id_dsa type -1
debug1: identity file /home/user/.ssh/id_dsa-cert type -1
debug1: identity file /home/user/.ssh/id_ecdsa type -1
debug1: identity file /home/user/.ssh/id_ecdsa-cert type -1
debug1: Remote protocol version 2.0, remote software version OpenSSH_5.8p1 Debian-1ubuntu3
debug1: match: OpenSSH_5.8p1 Debian-1ubuntu3 pat OpenSSH*
debug1: Enabling compatibility mode for protocol 2.0
debug1: Local version string SSH-2.0-OpenSSH_5.8p1 Debian-1ubuntu3
debug1: SSH2_MSG_KEXINIT sent
debug1: SSH2_MSG_KEXINIT received
debug1: kex: server->client aes128-ctr hmac-md5 none
debug1: kex: client->server aes128-ctr hmac-md5 none
debug1: sending SSH2_MSG_KEX_ECDH_INIT
debug1: expecting SSH2_MSG_KEX_ECDH_REPLY
debug1: Server host key: ECDSA 31:52:3e:91:b2:b2:74:cf:3e:65:37:a7:78:b9:3a:9e
debug1: Host '192.168.0.1' is known and matches the ECDSA host key.
debug1: Found key in /home/user/.ssh/known_hosts:4
debug1: ssh_ecdsa_verify: signature correct
debug1: SSH2_MSG_NEWKEYS sent
debug1: expecting SSH2_MSG_NEWKEYS
debug1: SSH2_MSG_NEWKEYS received
debug1: Roaming not allowed by server
debug1: SSH2_MSG_SERVICE_REQUEST sent
debug1: SSH2_MSG_SERVICE_ACCEPT received
debug1: Authentications that can continue: publickey,password
debug1: Next authentication method: publickey
debug1: Trying private key: /home/user/.ssh/id_rsa
debug1: Trying private key: /home/user/.ssh/id_dsa
debug1: Trying private key: /home/user/.ssh/id_ecdsa
debug1: Next authentication method: password
debug1: Authentication succeeded (password).
Authenticated to 192.168.0.1 ([192.168.0.1]:22).
debug1: channel 0: new [client-session]
debug1: Requesting no-more-sessions@openssh.com
debug1: Entering interactive session.
debug1: Requesting X11 forwarding with authentication spoofing.
debug1: Requesting authentication agent forwarding.
debug1: Sending environment.
debug1: Sending env LANG = en_US.UTF-8
debug1: Sending command: env
debug1: client_input_channel_req: channel 0 rtype exit-status reply 0
debug1: client_input_channel_req: channel 0 rtype eow@openssh.com reply 0
SHELL=/bin/bash
XDG_SESSION_COOKIE=5867400390852a975845598400000005-1329602079.30299-1173119600
SSH_CLIENT=192.168.0.14 34691 22
USER=user
SSH_AUTH_SOCK=/tmp/ssh-bPyNW11158/agent.11158
MAIL=/var/mail/user
PATH=/usr/local/sbin:/usr/local/bin:/usr/sbin:/usr/bin:/sbin:/bin:/usr/games
PWD=/home/user
LANG=en_US.UTF-8
SHLVL=1
HOME=/home/user
LOGNAME=user
SSH_CONNECTION=192.168.0.14 34691 192.168.0.1 22
_=/usr/bin/env
debug1: channel 0: free: client-session, nchannels 1
Transferred: sent 1960, received 1968 bytes, in 0.1 seconds
Bytes per second: sent 19601.4, received 19681.4
debug1: Exit status 0