I am using WP 3.4.2 ,seems evetything works . ( add pictures to galleries, insert them to posts ).
You can try to upgrade nextgen via WP panel after file changes.
I had this problem today. I not programer, but I made this:
1. I downloaded previos version (1.9.8) from here http://wordpress.org/extend/plugins/nextgen-gallery/developers/
2. In folder nexgen-galery/admin there are file upgrade.php
3. Replaced new version file with older version .
Now it works. (for me)
