I just tried the URL uploading and it worked.. then tried with your image and it failed.
That image has a HTML wrapper around it, I just tried to do a download direct from the server:
pulse@ultima:~$ wget [
bp1.blogger.com]
--01:03:27-- [
bp1.blogger.com]
=> `hyphen.jpg'
Resolving bp1.blogger.com... 74.125.45.103, 74.125.45.147, 74.125.45.104, ...
Connecting to bp1.blogger.com|74.125.45.103|:80... connected.
HTTP request sent, awaiting response... 200 OK
Length: unspecified [text/html]
[ <=> ] 362 --.--K/s
01:03:27 (51.49 MB/s) - `hyphen.jpg' saved [362]
pulse@ultima:~$ cat hyphen.jpg
<html>
<head>
<title>hyphen.jpg (image)</title>
<script type="text/javascript">
<!--
if (top.location != self.location) top.location = self.location;
// -->
</script>
</head>
<body bgcolor="#ffffff" text="#000000">
<img src="[
2.bp.blogspot.com]; alt="[hyphen.jpg]" border=0>
</body>
</html>