Gstory, I want to make sure that we get your pictures attached to your contact with no issues. I would like to try a few steps to see if we can get this back up and running. Please go into Settings, Application Manager, slide the screen to the left to get the the "ALL" section, Scroll down and tap on Google , Tap on Clear Cache, and then tap on Uninstall Updates. Once those steps are completed please head back into the Google Play Store, and update the Google again. Once you have updated the Google application, please try to go back and see if you can add a picture to your contact. Please keep us posted.
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Gstory, you need to clear all app preferences. Do this by going to settings, application manager, touch the 3 vertical dots in the top right corner, then hit "reset app preferences".
Now simply attempt to change a contact's picture. You should get an option on which app to choose now that app preferences are cleared. Choose the one that looks like your Gallery icon. (it wasn't working before most likely because it was set on Google's Picasa Photos app--the one with the icon that looks like a spining color wheel/flower)