Strange, as it gives only that error if the move_uploaded_file PHP function failes to move the file to the downloads directory. You can get the error when the file is too large for PHP's upload limit, when you haven't done the chmod or when the function is on the forbidden functions list of your host (some hosts implements very strict/strange security things).
Are you running PHP in safe mode (you can see this on the home of your AdminCP)?
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