Ssh – /etc/init.d/ssh restart does not reload the configuration

First off, the home directories in /etc/passwd should reflect the un-chrooted paths, or you'll run into problems in general. In this case, sshd checks for authorized keys before it chroots, so it needs to find them using an un-chrooted path. That's why your first try doesn't work.

Second thing to note: Under your first setup, when david logs in he starts in /var/chroot-home/david, but he is actually chrooted to /var/chroot-home, meaning if he types cd .. he can see all of the other home dirs (although not their contents, if permissions are correct). This might or might not be a problem for you, but it's a good thing to be aware of.

If the above is fine with you, you can use your first sshd_config, set david's home dir to /var/chroot-home/david in the passwd file, and add the following symlink so that david still starts in his home directory:

cd /var/chroot-home
mkdir var
ln -s .. var/chroot-home

That symbolic link will make sure that you can reach a home directory using the same path whether or not you are in the chroot.

However, if you don't want the clients to see the names of each other's home directories, you need to chroot into the home directory itself, as in your second solution. But as you've seen, sshd doesn't like that (because for various subtle reasons, it's dangerous to give a user write access to the root of a filesystem). Sadly, you're mostly out of luck here. One (kludgy) solution to this is to create a files/ subdirectory in each home directory and give the client write access to that instead.

Another option might be to chroot to /var/chroot-home anyway, and name the home directories differently, e.g. using the user ID number instead of the name.

You are confusing OpenSSH server with OpenSSH client.

After i upgraded openSSH to the latest version: OpenSSH_5.9p1 i tried to change the ssh_config , tried to set enable chrooted access and restarted the ssh with #/etc/init.d/sshd restart. But it gives the an error specific to the old version: OpenSSH_4.5p1.

ssh_config is the configuration file for client.

/etc/init.d/sshd still uses the old version /usr/sbin/sshd. Looks like the new version been installed in /usr/local/bin/ssh.

In /etc/init.d/sshd i tried changed SSHD from /usr/sbin/sshd to /usr/local/bin/ssh. But then i could not restart the ssh due to this error:

/usr/sbin/sshd is OpenSSH (server) daemon while /usr/local/bin/ssh is OpenSSH client.

result of rpm -qa | grep ssh is empty

It means that you removed all the OpenSSH binary packages. If you want to compile the new version from source, make sure that you install the OpenSSH server and edit your init script to point the daemon to the new location (/usr/local/sbin/sshd).