Actually your update reveals that ipkg is pointing to the wrong ipkg list. That is the old location. here was the output from my search list.
[shinji@WL-XXXXXXXXXXXX root]$ ipkg update
Downloading http://ipkg.nslu2-linux.org/feeds/op...table/Packages
.gz
Inflating http://ipkg.nslu2-linux.org/feeds/op...ble/Packages.g
z
Updated list of available packages in /opt/lib/ipkg/lists/optware
Successfully terminated.
[shinji@WL-XXXXXXXXXXXX root]$ ipkg list | grep openssh-sftp-server
openssh-sftp-server - 5.1p1-1 - sftp-server only from a FREE version of the SSH
protocol suite of network connectivity tools.
[shinji@WL-XXXXXXXXXXXX root]$ ipkg list_installed | grep openssh
openssh - 5.1p1-1 - a FREE version of the SSH protocol suite of network connecti
vity tools.
openssh-sftp-server - 5.1p1-1 - sftp-server only from a FREE version of the SSH
protocol suite of network connectivity tools.
Yours is pointing to http://ipkg.nslu2-linux.org/feeds/un...l500g/Packages but mine is pointing to the newer http://ipkg.nslu2-linux.org/feeds/op...le/Packages.gz. I think you were supposed to install ipkg-opt early on so it points to the new repository. I found that note in the changelog for 1.9.2.7-8. I have 1.9.2.7-10 installed right now.