When I attempted to upload an image to WordPress 2.5.1, I was prompted to input my login and password in the image uploader. After feeding the information to it, it just gave me an error and no image was uploaded at all.
I used the No-Flash-Uploader plugin and the issue is gone. The moral? The newest version isn’t necessarily the best version!
Update: The plugin appears to be the simple solution to the problem of failing to upload pictures in version 2.5.1. But I recommend you to upgrade your WordPress to a newer version to avoid using an extra plugin to upload images. Right now I am using version 2.6.1 and the default picture uploading function works well.