I can confirm this bug in up to date lucid.
The strange thing is that you don't need to enter the right password.
You either click OK, Cancel or Close three times and you get into your new 
directory.
I tried it in a guest user session too. It's the same.

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openssh (or gvfs) asks for a password everytime I change directory in sftp
https://bugs.launchpad.net/bugs/540280
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