warning: open_basedir restriction in effect.

This seems to result from a server setting, commonly in place for security reasons in hosted environments. Either PHP is in "safe mode" or an open_basedir restriction has been set (restricting the directory from which files can be opened). These settings can be changed in your php.ini, but generally in hosted environments you don't have access to this. If this is the case, your host may make adjustments on request. For reference see http://drupal.org/node/14869.

Alternately (if you're willing to get your hands dirty!) there is a patch available for the file.inc file, see http://drupal.org/node/5961. To use this for 4.6, add the following lines below

$file->source = $source;

(line 142 in my copy).

    // Check if open_basedir restriction in effect
    if(!is_readable($file->filepath) && ini_get("open_basedir")){
    	$tmpname=tempnam( variable_get('file_directory_temp', (PHP_OS == 'WINNT' ? 'c:\\windows\\temp' : '/tmp')),"tmp_" );
    	if(move_uploaded_file($file->filepath,$tmpname)) $file->filepath=$tmpname;
    }