Quote from ThrikThe media handling functionality was dramatically upgraded about a year ago in WordPress. Have you used it since then? I personally think the way it handles media is fantastic, able to auto-generate galleries and whatnot. I use them all the time on my WordPress site. You can even easily get per-image comments.
There's no upper limit on image resolution, to clarify. It'll always leave your original image as the largest size, and then auto-generate three smaller sizes for you that you can specify.
For some reason when I put in an image of 1680x1050 it looks like it's doing the auto image generation but what actually happens is it posts the full res image in the blog. So far the only way I've been able to rectify this is to reduce the image enough that it manages to correctly create a thumbnail.