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The log indicates that public key authentication failed, so it tried your password next.
Sudo has literally nothing to do with SSH, so there’s no point in changing its config to resolve this.
As for permit root login, there’s no difference in how public key authentication works for users and root, other than where sshd will look for the authorized_keys file (their home directories)
So you need to go look in the authentication logs on the server, /var/log/auth.log usually, and read the error there that will indicate why log in failed.
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