The same thing is happening to me. yesterday afternoon I was able to upload images with no problem. About 3 hours later I went it to add some more images and they were not uploading correctly into my media library. There was no thumbnail of the picture and when I tried inserting the image into a page it would show up as a broken image.
I don’t know whats going on, but now I have several pissed customers. My servers with network solutions will not let me change chmod to 777.
Why, all of a sudden did this break? I installed NextGen Image Gallery and tried uploading to there with the same results.
However if you try to edit the picture properties, the picture will show up, but still unable to insert to page or post correctly. Shows missing image icon in IE and no image at all in FF or Safari.