In case you didn't notice, rolled up in the Windows Updates was a minor update patch for Windows Live Writer.
I had noticed the primary issue before (that images posted to Blogger in WLW would open in a download box rather than the image in the browser window) but thought that was a bug in Minefield (Firefox 3.0 betas).
Windows Live Writer update details - Microsoft KB951125.
If you check you Windows Updates after you apply them, you should see that it was included if you have Windows Live Writer installed on you system.
Anyway, once I applied the update on my systems, I found that I was now unable to post to Blogger at all. I kept getting post failure messages.
So I tried something easy.
On the menu-bar I went to Weblog > Edit Weblog Settings...
I clicked the "Update Account Configuration" button.
Then I just clicked "Next" without making any changes so WLW could re-download my Blogger settings and configurations.
That completed successfully without errors.
Then I tried to repost the blog post I had just composed but which was failing.
It posted quickly without any errors now.
Looks like the update causes some minor issues with some posting configuration files.
So if you run into that issue, post WLW update, give this a shot to refresh the settings.
Worked like a charm.