Found! Solution for Blogger Pic update issue

This was provided through Google Forums by YVOLOW:

Try this manual method. Its an extra step though.

Still upload the usual way (choose ur size accordingly cos that will be how u want the pics to show on ur blog) but when the picture is uploaded, DO NOT click done. Instead, right click on the pic, left click on properties & copy the URL (add) there. Do not close the uploaded image window. Just minimise it.

On ur blog window in edit HTML format, input the following:

where URL is the URL(add) that u hv copied. Close the uploaded pic window before u click publish. Once u click publish, u shall be able to see ur pics.

Hope the above helps. :) Happy Blogging.

It IS an extra step and it provide a temporary manual solution- Unfortunately, it's still NOT A FIX for a blogger bug.