You need to ensure the picture you are using has been re-sized to no larger than 100x100 pixels before you upload it. You can do this using MSpaint or MS Picture Manager.

Don't forget to save the resized image with a different file name or you will lose the original. I usually add 'sm' at the end some-where (ie. my-avatar-sm) so I can identify it from the thumbnail of the original later.

Once you have your resized picture sorted, give the Avatar upload dealio another whirl in the 'User CP' section. Should be Bob's your Uncle.