This looks to be an issue with the upload file function when you use it to upload a large picture. I've just reproduced this and I'm going to report it to our vendor.
A workaround would be to create a new document and embed the picture in rather than using upload file with a picture. The end result is the same, but it'll look a lot more presentable.
But to make myself clear, that's a workaround - doing what you did should have worked and I'll see if we can get this fixed for a future version.
It is strange that the image came out so large without scaling - the same image is embedded in the corresponding blog and it looks fine there.
This is the first time I uploaded an image by itself and there was no preview and there didn't seem to be any built-in way to scale it. When I click on the image to "Click to view larger image" it fits it nicely to my screen.
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