Wrong Device answering PPPoE auth request

You need to do a lot more then just configure pppd options; you also need the PPPoE server to handle the ethernet stuff.

#!/bin/bash

killall pppoe-server

MAX=250
INTERFACE=eth0
BASE=10.10.100.1 # clients get an IP starting here.
MYIP=10.10.10.252 # set to your eth0 IP address.
/usr/sbin/pppoe-server -T 60 -I $INTERFACE -N $MAX -C CANADA -S PPPoE7 -L $MYIP -R $BASE

This is basically the script we use with our test DSLAM and PPPoE stuff in our office. We are running on Debian Lenny so it should all work similiarly on Ubuntu. You also may need an /etc/ppp/pppoe-server-options file with just the following in it:

login

You might also need to at least add the username (with a bogus password) in /etc/ppp/pap-secrets?

The man page for pppd says to use the following in the options file to disable CHAP:

disable-chap

"peer refused to authenticate" is the explanation. It's logged by your client's pppd, so the server is the peer that it's referring to.

PPP is not inherently a client-server protocol. It's symmetric. That means each end of the connection can require the other end to authenticate itself. In ISP-like configurations, authentication goes only one way. The client proves its identity to the server, but the server doesn't prove its identity to the client.

If you want to use that type of setup, you have to give the client's pppd the noauth option, which tells it not to require authentication from the server. Adding it to /etc/ppp/peers/myisp should do it.

If you want to authenticate both ways, that should be doable too.

update

Since you've posted the latest logs, the new problem is the login option. login means that the client's PAP password is expected to match the user's password in the system user database (i.e. /etc/passwd and friends). If you're trying to define the password exclusively through pap-secrets, remove the login option.