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I just tried it with my gmail and web albums.
I clicked on a contact in gmail, where it has a gray placeholder picture I clicked 'Add a Picture'
From there I get the choices of 1)My Computer, 2)Web Albums and 3)URL When I click Web Albums I have access to all my web albums and can find a picture of that person and click it. Then it allows me to crop it for the space alloted and voila! That picture is now attached to that contact.
If you follow that procedure, where did it break down?
Check and be sure you are logged into the right account for accessing the web album.