The theme I was using Magazine Basic version 2.7.9 worked great for doing this with Flickr images. It simply used the first image in the post at the featured image, which also meant if you composed your posts using something like Live Writer rather than in WP directly, the feature image features still worked.
With over 1500 posts on my blog, I didn't want to have to manually assign a feature image to my back catalogue of posts and this worked wonderfully.
However, the latest up theme upgrade (to version 3.0) removed this functionality (since it introduces a performance hit.)
(Sorry about the rant - but help would be appreciated!)
Does anyone have a solution? At this point I'm even willing to do the manual fixes if I have to.