ssh problem on 64bit Win Server 2008. bzr.exe process stuck.

I have SSH successfully set up on the server and can connect to the server as well. I have also successfully set up the initial depot on the server and tested it locally on the server.

Now when I try to create a branch from a remote client via:
   bzr branch bzr+ssh://75.108.xxx.yyy/d:/repos/main
bzr.exe is stuck and does not return after showing the following 3 lines:

  Connected (version 2.0, client WeOnlyDo)
  Authentication (publickey) successful!
  Secsh channel 1 opened.

On the server side I do see that the bzr.exe process was launched. .bzr.log on the server does not reveal anything. The only line it writes into the log is:
   0.173 bzr arguments: [u'serve', u'--inet', u'--directory=/', u'--allow-writes']

I am using procmon.exe on the server to observe whether bzr.exe process is attempting to hit d:\repos path and it is not.

Additional info:
bzr version: 1.12
OS: Windows Server 2008 64bit
Repo size: 17MB (tried also with a depot with only 1 small file; same problem)
Client <-> Server network bandwidth: plenty
I do run a similar setup against a different depot on a different server (same client). One difference is that this server is 32bit.

How can I find out why creation of the client side branch is not working.
Are there any debugging option that I can turn on to better understand why bzr.exe process is stuck server side?