64MB is plenty.
Have you tried disabling any plugins that might affect avatar uploading?
Do you see anything in your logs regarding a mod_fcgid? I always get that error on Ubuntu server when I first start uploading images over 100kb. Can be fixed by setting MaxRequestLen in vhost config
mod_fcgid
@Matt Beckett
i did that. I even disabled the default plugins like messages friends and such.
@Mark - nope.
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