Você está usando o OpenSSH 5.3; %h foi introduzido apenas no OpenSSH 5.6 :
Changes since OpenSSH 5.5
=========================
* Expand %h to the hostname in ssh_config Hostname options. While this
sounds useless, it is actually handy for working with unqualified
hostnames:
Host *.*
Hostname %h
Host *
Hostname %h.example.org