Modify the S50sshd script (./package/openssh/files/S50sshd) that ends up in /etc/init.d/ such that the names of the keys are:
ssh_host_rsa_key     and       ssh_host_dsa_key.
The original script swaps the position of host and rsa/dsa in the name.

In /etc/ssh/sshd_config (rename the link and copy it to a writable sshd_config) uncomment the option UsePrivilegeSeparation and set it to no.
After that no need to install dropbear as ssh and sftp both are taken care of by sshd. This sshd_config shows up in many places in the package source files. As Linux&C&CVS newbie not certain where to change this so have done it in the working wrt54g. Also rather leave committing changes to the experts.

Noticed something peculiar. Just in menuconfig under Openssh selecting the servers and not the clients produces code that makes my WRT54G v2 unstable; Every few seconds the unit resets. Selecting bot clients and servers under Openssh gives working code.