have you checked folder permissions 

I checked the permission and it is set to 777. It seems like something is going on when it calls this javascript function addNewPhoto56491c137cbd6()

Check your firebug console, seems like you have mod_security module enabled on your server, there should be "Forbidden" error in the console, if there's, you need to contact your hosting provider to disable mod_security. 

I had service provider disable the mod_security. Now I am able to upload photos :) Appreciate your help. Thanks!

great

I'm also having a similar problem.  Disabling mod_security seems to make no difference.  Funnily enough, it's only a problem with uploading from the sidebar link.  Users can upload photos fine with the "Upload Photos" button on the Photos page.

Whenever one runs a mouse over the Add New ... Photo element in the sidebar, it calls up the following link:
javascript:addNewPhoto5677ec34e2266()

Clicking that link produces a blank page

What exactly do you see? Error, notice or what? Have you checked your browser console for an error?

To make it clear, the javascript numbers change, but the format is as above.  Multiple users have reported the same issue

do you have external no-follow or other plugin related to the links or seo?

if so try to disable it and see if the issue persists. 

Deactivating the "External Linker" plugin seems to resolve the problem.  Thank you!

Great, contact plugin developer to resolve the issue.