I have tried PNG as well. Neither image works for custom background on home page, but according to Portal Help it should be fine. The error message is very generic.
Interesting, I tried again the other day and was still not able to get the background image to apply. I may submit a support case.
Thank you for the help!
Tim
I discussed this with another user who was seeing the same error. Turned out decreasing the size of the image fixed the problem. I would contact Technical Support to get a bug logged and provide the image as it is.
I had the same problem in both Chrome and IE. For me, the issue was that the path of the file was too long. Saving the exact same PNG file to my desktop and uploading it worked.