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It’s assumed you have OpenSSH and the BSD Subsystem installed via Installer.app or whatever else..

I’m also assuming you use a Mac or Linux, Windows guys, it’s really not that much harder just look up a tutorial on how to create a public key with PuTTy

Open Terminal on your Machine (not logged into the iPhone) run these commands:
$ ssh-keygen -t dsa
$ scp ~/.ssh/id_dsa.pub root@**YOUR_IPHONE_IP**:/tmp

Now SSH into your iPhone..

If you haven’t already created the .ssh directory, do so by doing this:
$ mkdir -p /var/root/.ssh/

If you have already tried to do this, I’m going to suggest clearing out the authorized_keys file to prevent any complications
$ rm /var/root/.ssh/authorized_keys

And now, run the following commands:
$ cat /tmp/id_dsa.pub >> ~/.ssh/authorized_keys
$ chmod 0755 /var/root/.ssh/authorized_keys
$ chmod 0755 /var/root/.ssh
$ chmod 0755 /var/root
$ exit

You should hopefully be able to login now without requiring a password.. let me know your results!

Note: The chmod to 0755 is very important, and won’t work if the permissions are not setup correctly.

Update: I fixed all the commands, they should work for everyone now