Did you go into "User CP" and then "edit Avatar"? If so, then the trick is to skrink the picture you want to use down so it can be used as an Avatar. I open the picture I'm using in "Paint" (if you are using windows this program is found under "Accessories" found in "Programs" in the start menu. Under "image" you will find "stretch and skew". You can use this feature to shrink the picture down to Avatar size. Once you get it to the size you want, then save it as a .jpg file and then upload it as your Avatar. You'll have to play around with the size in "Paint" a few times to get it right, but that's how I did it.
I'm sure there are easier ways to skin this cat, but that's how I did it.
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