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]]