Here's how it works should you want to use a photo which is already in your Picasa web album in your blog.
Step 1- go to your Picasa web album account;
Step 2- click on the album where you have the photo stored;
Step 3- click on the photo you want to use to open up;
Step 4- click "Link to this photo" on the right hand side of the window;
Step 5- click "Embed image", then copy the code in the box;
Step 6- go back to your blog page, click on "Edit Html" and paste the copied code where you want the photo to appear;
Step 7- click "Preview" to see if your photo is there on your blog page;
Step 8- click "Compose" and continue blogging.
I tried and it worked. But the photo uploaded this way will show the source (From...), like this.
|From Blogger Pictures|