Apple - Why can't I paste into the password dialog when mounting an encrypted disk image?

No, you aren't doing anything wrong. Apple doesn't allow you to paste into certain secure dialog boxes. It's a feature, not a bug. (It makes a brute force hack of the dialog box more difficult.)

You can paste the password into the command line if you mount the secure image using hdiutil.

Open Terminal and type:

 hdiutil attach /path/to/imagefile -stdinpass

When prompted for the password, copy it from a text file or (preferably) a password vault and paste it into terminal.

If the path/to/imagefile is complex, you can type the command, a space, then drag the imagefile icon from the finder into the terminal window to automatically enter the path/filname.

I wrote a very tiny AppleScript application which allows you to paste passwords even where its not allowed by tricking the system into thinking that you're typing on your keyboard. The downside: it takes space in your Dock.

You could also run a script like this in AppleScript Editor:

tell application "System Events" to tell process "SecurityAgent"
    set value of text field 1 of window 1 to (the clipboard)
    click button 1 of group 1 of window 1
end tell

It requires access for assistive devices to be enabled from System Preferences.