I've been having the same problem too!
I maintain a couple of
website hostings/blogs with eukhost for different clients and they all have the same problem. It only appears to have started recently.
i've tried creating a new blog via the auto install as well as uploading one manually and i get the same error when creating a post with an image in it.
i've also tried using an absolute url to an image on another
website hosting and still the same problem.
i would be interested to hear if you have any luck with support..