Settings >> Applications >> Manage Applications >> All tab
For each of the following, I clicked on Clear data and Clear cache: (Just clearing Gallery did not do it for me)
Media Container Service
Then I restarted phone by holding down power button, clicking Power Off, then held it again to turn on and working great! It did take a few minutes for the Gallery to get all the thumbnails again the first time I started it, but it works!
I was afraid I deleted all files on SD but they are all still there. Just be patient, will take several minutes for Gallery to repopulate.
Good call SailMaker. I had the issue reoccur and tried your method this time. Its worked well! So thanks! As an aside, It changed my ringtones for the standard ring and handcent alert to something different then what I had, but not the default sound, which was weird, but easy to correct.