There are a couple limits on the size of images when you start to talk about Google's App Engine:
10 MB -- the upload limit
1 MB -- the manipulation limit (I do not know what else to call this)
But, folks have reported that they have exceeded the manipulation limit while working with images that are smaller than 1MB...
So, it seems there is another limit that is coming into play. My guess is there is some limit to the size of the image after it has been transformed into 24/32 bit pixels.