Check your file permissions to make sure the uploads directory is set to 777..
Actually my answer is just the most common to image uploading problems but I did not notice the exact error you were having. I will get back to you after I look through my notes. I know I have encountered this issue but can't remember the fix..will get back to you though once I find it.it does have something to do with mod rewrite though.
Are you using Vbseo or mod rewite for your urls? Have you made any other changes to your htaccess?
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The issue I had with this same error was related to image sizes. I fixed it simply by going into attachment options. I'm not sure though if this is your problem because mod rewite or even permissions can cause similar results.
I would check your attachment settings and make sure you have them set correctly.
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