This is odd. I was using google images to search for album covers to paste into my iTunes.
Here's a sample one:
http://www.geocities.jp/pinkytanaka/img591.jpg
I right click, choose "copy image to clipboard", switch to iTunes and paste -- and get only a strip of the image!
This also happens if I switch to Preview and choose "new from clipboard", or if I drag the image to iTunes.
If I drag the image to the DESKTOP, I get the entire image, and I can then drag THAT into iTunes,