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1st turn off telnet! If there are a small number of users you can add the DenyUsers option to your sshd_config. If there are a bunch of users create an ftp group and add users to that group then use the DenyGroups option in your sshd_config.
As mhiggins mentioned disable telnet (if you don't have it disabled already).
Then you can deny them in sshd_config as mhiggins suggested or you can use "/bin/true" or "/bin/false" as their shell
and add it to "/etc/shells"
This way they are permitted to FTP (because their shell is in /etc/shells) but they can't ssh (or login in any other way) because
they don't have a valid shell.