What you are describing is an attempt to enter the shell with a user who is a ftp-only user (shell access is not allowed).
Go to Control Panel → Users → User Management, select the "Edit" link next to the user you are facing, and make sure that the switch for "shell" is selected. Submit the form and wait for it to take effect (this is usually a matter of minutes).
As soon as the change takes effect, you should be able to use telnet (although please do not use telnet, as it is unsafe) or ssh into the shell without problems (provided that the user / password is correct).
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