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I tried to install nginx for my Wordpress site too, but I went back to a virtual host setup with apache and suphp. This works the best for my on more than 5 servers. I’ve follow the steps from this tutorial: <br>http://www.web-development-blog.com/archives/how-to-install-a-linux-web-server-ubuntu/
This probably means that the image you are uploading is larger than PHP’s maximum upload size. http://css-tricks.com/snippets/php/increase-maximum-php-upload-size/