Uploads (both methods) fail

WP 3.2.1 / Avatars 3.5.5 installed over WPMU 2.9.1 and blog-avatars 3.4.0. Upon removing the old plugin and activating the new plugin, old avatars folder content was not moved so I did it manually to wp-content/uploads/avatars with permissions set to 755 for both uploads and avatars.

All attempts to upload new blog or user avatars fail. With the primary method. I get a crop box over a broken image icon. Both the primary and alternative methods result in this message: "There was an error uploading the file, please try again."

I have tried setting permissions on both uploads and avatars to 777 but it does not help. Existing avatars are fine after moving them to the new location.