Do you see "Public key authentication enabled." message in server's log?
If not, you configure the server incorrectly.
If yes, and it is still not working, please post here debug log. It can be produced like this:
using (var sftp = new Sftp())
{
sftp.LogWriter = new FileLogWriter(@"c:\data\sftp.log", LogLevel.Debug);
sftp.Connect("localhost", 22);
sftp.Login("tester", new SshPrivateKey(@"c:\data\user1.pri", "password"));
}