Seems like the server does not want to allow it based onthe output of auth.log. I'd try adding arcfour back into the SSH server's sshd_config file. From the sshd_config man page:
excerpt
Ciphers
Specifies the ciphers allowed for protocol version 2. Multiple
ciphers must be comma-separated. The supported ciphers are
“3des-cbc”, “aes128-cbc”, “aes192-cbc”, “aes256-cbc”, “aes128-ctr”,
“aes192-ctr”, “aes256-ctr”, “[email protected]”,
“[email protected]”, “arcfour128”, “arcfour256”,
“arcfour”, “blowfish-cbc”, and “cast128-cbc”. The default is:
aes128-ctr,aes192-ctr,aes256-ctr,arcfour256,arcfour128,
[email protected],[email protected],
aes128-cbc,3des-cbc,blowfish-cbc,cast128-cbc,aes192-cbc,
aes256-cbc,arcfour
Incidentally, there is nothing wrong with your -o Ciphers=arcfour switches from what I can tell. I even found this SU Q&A titled: sshfs mount without compression or encryption that shows the same approach.