You can encounter this error for a number of reasons.  Some things to try:

1. Ensure that your upload directory has the correct permissions set for it (777).

2. In Admin > File Upload Preferences, use your full server path in the Server Path to Upload Directory preference.  This is the full server path to the directory, not a relative path (and not a full URL).  If you do not know your server path you may need to contact your Host or server admin.

3. The error can also occur if ExpressionEngine could not copy or move your uploaded file from the temporary upload directory, as specified by your server.

4. Some people have reported this error when they left the trailing forward slash (/) off of the end of their directory name under Admin > File Upload Preferences (or Gallery or Forum preferences).