Today one of my colleague Praveen had an issue with image upload in wordpress. His site was hosted with my account. The error he getting was “Unable to create directory - Is its parent directory writable by the server?” . I had changed the permission to 777 and still the upload was not working. After lot of googling we found a solution . We changed the settings for “Uploading Files” in Settings->Miscellaneous Settings. We set “Full URL path to files “ using the the full URL path.
Check the screen shot below:

#1 by Albert Lumu - April 17th, 2009 at 21:49
Worked like a charm! Thanks!