Deb-I was unable to get pictures uploaded also and have been fighting with it for awhile, so after researching help forever I switched back to the old blog post editor. (go to settings, basic, then select post editor at the bottom of the page)and was then able to upload my pictures. Then after getting them upload, I couldn't get it to post so I saved the post with my uploaded pictures, had to switch back to the new post editor and then could publish my saved post. Not sure why it's so complicated, how frustrating, huh? I've been trying to get it figured out for a couple of months! Hope that is some help.
This is strange. You should be able to load photos if you have not used up all the allocated storage space at Picasa Web Albums. Sometimes, Blogger does funny things and I do understand your frustrations.