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In a system were both sides have access to a common secret, and publicly exchange an iteration count and salt, can a PKCS#5 (Password-based Encryption Standard) algorithm be used to generate a key suitable for use as a session key to support AES encryption of a small stream (<1Mb) of data?

My question is: can both sides run the algorithm--given the "common secret", publicly available salt, and iteration count--and then generate the same key?

The intention is that a new session key would be generated via this process for each new connection.

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Yes. PBKDF2, defined in PKCS#5, is deterministic; you can check its description.

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