TinyMCE has a feature that auto-converts relative links to absolute ones. This is a good thing for WordPress, since anybody using non-default permalinks needs this feature for their links to work.
The problem is that TinyMCE in 2.5 is converting all the relative links as if they are in the wp-admin path. This is breaking image insertion as well, for some people.
The root cause is the lack of a defined "document_base_url" setting. When TinyMCE cannot find one, it uses the current url of the page it's in, which happens to be the write page in wp-admin.
Possible, but untested, fix is to add this to the tiny-mce-config.php file:
'document_base_url' => get_option('url'),
This should set the site root as the correct base and allow it to convert the relative links correctly, as the user would expect it to convert them.