Hi, I had exactly the same problem.
Go into Theme options> General and check if
Post Thumbnails is set to Hard crop post thumbnails.
I am pretty sure I would have set it to off but it was on.
( I should point out that this problem only seems to have occurred in the last month or so – if I chose an image that was uploaded before may then it displayed correctly so I don’t know if some update switched it on or something)
