I have this problem too. Here is the strange dot cursor described while highlighted:
Interestingly, I first noticed the "cannot log in" problem today when I tried to log into my home computer from work.
To log in remotely, I am coming in through my Apple Airport Extreme, which forwards ssh connections to a small netbook I have running Linux. Once logged into the netbook, I can use ssh to log into my Mac Mini--or, rather, I was previously able to.
Today, from work, I noticed that I could still get into the netbook, but I got the "password just won't work" problem that the op here notes.
I also noticed that my netbook was telling me that the RSA key fingerprint of my Mac Mini had changed, but I assumed that was due to the upgrade to Yosemite.
Anyway, I came home and sure enough, the ssh login failure happens here too.
ssh server just seems to be broken. I cannot log into my Mac at all.
Bug in the release version of Yosemite?
I'm not sure if I logged into the Yosemite beta or not using ssh, but I suspect I did.