Free Image Hosting Websites suitable for craigslist ad posting:

Free Image Hosts for classified ad posting on backpage and other sites:

ImageShack.us **Use the above form to upload image on imageshack. No signup is required.
http://tinypic.com No signup is required.
PhotoBucket.com Signup is required to upload photos. Very reliable.
http://xs.to Can resize images. Signup is not required.
The image spot
http://webshots.com Signup is required.
www.fotki.com

Not every image host can be used for posting ads on craigslist or backpage or similar sites. Because most of the free image hosts don't allow hot-linking meaning that you aren't allowed to use the original image directly on other sites. The above image hosts are free, reliable and allows hot-linking. So these are suitable for ad posting on free classified sites.
Posting an image ad increases response significantly. So include images when you post ads on craigslist, kijiji or backpage or any other site.

How to post an image ad on craigslist:
Upload your images on your web server or on any free image hosting site listed above. Then link the image to your website using following code:

<a href="http://some-website.com"><img src="http://image-url" border="0"></a>

If you do not need link to your website then simply use the image anywhere in body of the ad using following code:

<img src="http://image-url" border="0">

See Also:
Craigslist posting tips
Free Classified Sites
Review of free classifieds sites