That sounds like a browser issue to me.
Do not log-in on the front page of WordPress.com. Do not create posts here > http://wordpress.com/#!/post/
Instead I recommend that you ONLY log-in directly you your own blog and ONLY create posts and edit them here > Dashboard > Posts > All Posts > Add New
If you are not running one of the browsers and versions listed at http://browsehappy.com/ please try upgrading or switching first.
Note: If you are using an IE9 browser in compatibility mode that makes it render as IE7 and IE7 is not supported. To disable see > http://www.sevenforums.com/tutorials/1196-internet-explorer-compatibility-view-turn-off.html
If you are, please do these four things:
1. Try clearing your browser’s cache http://www.google.com/support/accounts/bin/answer.py?hl=en&answer=32050
2. Make sure that you have third-party cookies enabled http://en.support.wordpress.com/third-party-cookies/
3. Try with all browser extensions or add-ons temporarily disabled.
4. Try enabling HTTPS: http://en.support.wordpress.com/https/
If you are not successful let us know which browser (and version of it) you’re using and post any error reports you get.
These are the accepted file types:
Instructions for image uploading are here > http://en.support.wordpress.com/images/
Here are more details about the options for uploading images:
For creating a gallery see here > http://en.support.wordpress.com/images/gallery/
For troubleshooting images here > http://en.support.wordpress.com/images/troubleshooting-images/