"An image thumbnail was not able to be created." error

When trying to upload a picture to Drupal 6.x the following error is return

An image thumbnail was not able to be created.

The most likely cause of this error is the security settings on the files folder as well as its sub-folders. Drupal is trying to write a file on the server but is denied write access.

Here are the steps to fix this:

Set the security permissions on the following folders to allow WRITE. In other words set the CHMOD to 777 on the following folders. To do so you could use a FTP tool.
/sites/default/files/
/files/
/sites/your-domain-name-here.com/files/

Note 1: If you can't find some of those folders that's normal. It depends on your Drupal setup. But you should at least have one.
Note 2: You must allow WRITE to all sub-folders inside the files folder.
Note 3: For security reason some sub-folders inside the files folder should NOT have write access. Which folder? Usually each module comes with a README.txt file. Read each README file the answer is there. For example the module 'backup_migrate' as some folders that should not have write permission.

That's it. You have successfully set the security permission to WRITE on the appropriate folders.

Test it by uploading a picture to your site.