I'm doing this on localhost so I have complete control
Creating a new post, I try to set a featured image. The image in question is a 355 KB png, but I've also got the same result with a 157 KB jpg and a 34 KB png.
Here are the relevant php.ini settings:
post_max_size = 0
upload_max_filesize = 50
Mmemory_limit = 24M
max_execution_time = 60
pictures upload fine using the browser uploader, but it doesn't set it as a featured image, just inserts it into the post.