I had the error “Update error: Cannot create test thumbnail.” with WP 2.7 and got it working following this:
1) Created a new directory under /wp-content/uploads. Called it ‘thumbs’
2) Did a CHMOD 775 on the new directory from step 1 ( /wp-content/uploads/thumbs/ )
3) Logged to WP admin and went to Dashboard-> Settings-> Post Thumb-> Basic Options
4) Entered the following in the “Folder Name”:
wp-content/uploads/thumbs
5) Hit “Update” (obviously)
Note: CHMOD 777 did not work so i used 755 as suggested above and got it working on ipowerweb.
