First, I'm assuming that the pic uploaded ok. There is a limit set by the upload_max_filesize setting in /etc/php.ini (on POSIX systems, not sure where it is on windoze). This is separate from the soft limit of 100K which causes mediawiki to issue a warning to the uploader.
When I've tried to upload an image bigger than the max, IIRC I usually get an error at the time of upload, something like the file is empty.
Failing that, it likely depends on how you are doing image sizing. I'm using ImageMagick and I haven't had problems thumbnailing pretty large images, although I haven't specified the size, in other words I've used [[Image:blablabla.jpg|thumb|caption]] but not [[Image:blablabla.jpg|thumb|340px|caption]]