Ignore the "link to this image" links on the right side of the Picasa screen. Just right-click on the actual picture you want to use and choose "Properties". You will see an Address there, which is the full URL of the picture. Select the full address, and copy it. Make sure you've copied the whole address, it needs to start with http: and end with .jpg or .gif. Come back here and while you're editing a post, hit the yellow postcard icon and hit paste:
That's it...
That pic is when Valentino was just a pup, and is from my picasa web album.
The full address for that pics looks like:
http://lh4.ggpht.com/_G2yT6onVWw0/R2...side%20011.JPG
No idea why google does silly things with the "link to this image" which disables direct linking, yet they allow the URL of the pic itself to be seen right in the properties. I don't get it.