i tested the header, and the behaviour is very strange. The image you have provided is the right width without cropping, but the header tool crops out the left and right, leaving the center that then gets stretched (and therefore is pixelated).
I think you need to contact support using the Support button that is normally available on your Dashboard Monday-Friday. Make sure you give them all of the following information:
- your browser
- your browser version
- your FULL blog address (not the name, the real address that begins http:// )
- your FULL username
- your REAL email address that is registered here
- and a very good description of the exact problem
Edit: when i did the test, i tried to make the crop space larger, and it wouldn't do it. I also converted the file from a jpg to a png, in case the format was doing something weird, but i had the same results. Very, very weird.