Hey eibhlin,
Thank you for solving my problem with the image issue. I read your instructions and that helped me! https://www.flipstips.com
First, I had to fix the problems created by rolling back to 2.6.5.
2.6.5 files had changed the database Uploads path to the full path (myusername/root/domainname.com/wp-content/uploads/…) so I had to go into pHpMyAdmin and change it back to /wp-content/uploads in the Options section.
My existing images reappeared on my website. Whew!
But, retrying 2.7, I was still reaching the error message when I tried to upload new images through WordPress.
An overnight conversation with tech support ensued, and they found the problem.
In my case, the new (2.7) wp-content/uploads folder had automatically uploaded with CHMOD 777. Apparently, my hosting service (Hostgator) won’t allow 777, only 755.
So, switching all folders back to CHMOD 755 solved the problem.