WP shrinking images in posts

I have inserted a 350W X 243H jpeg which takes 32KB on my hard drive. It was created with Adobe Photoshop’s Save for Web function. I entered the dimensions in the img link (which is good practice), but after saving the page, I found a badly pixelated image. I deleted the dimensions from the img statement, and the picture shrunk considerably (and unevenly: to about 48% in width and 36% in height), though at that size it is sharp. It is as if WP is reducing the file size.

Here is the statement, minus the dimensions:
<img src="http://verbalcook.com/wp-content/uploads/caponata.thumbnail.jpg" alt="My version of caponata" />

I placed it in a simple HTML page and previewed it locally, and it was the right size and desired sharpness.

I am using the Classic theme on a Macintosh. The instructions on how to insert an image refer to things I am not seeing on my edit pane. I selected Full size and None for the link, but no picture appeared in the preview or on the page. These do not seem to be sticky, as every time I go back to the image editor, it shows Thumbnail and File. Is this a clue to what I am doing wrong?

Anyway, I got the picture to appear by writing the line of code by hand.

Appreciate any help in solving this, as this is one image of many.

If you want to look, the page is public. The image really is intended to be crisp and 350 pixels wide. http://verbalcook.com/?p=17