Versions below 3.3 of OpenSSH require SSH-2 RSA signatures to be padded with zero bytes to the same length as the RSA key modulus. The SSH-2 specification says that an unpadded signature MUST be accepted, so this is a bug. A typical symptom of this problem is that PuTTY mysteriously fails RSA authentication once in every few hundred attempts, and falls back to passwords.
If this bug is detected, PuTTY will pad its signatures in the way OpenSSH expects. If this bug is enabled when talking to a correct server, it is likely that no damage will be done, since correct servers usually still accept padded signatures because they're used to talking to OpenSSH.
This is an SSH-2-specific bug.