On RStudio version 0.98.501 I had a long .Rmd file which was easily converted to html once I clicked KnitHtml button. The Knitting process, as I understand, created several fold
@Yihui's comment above was the answer that worked for me, and it's not a current answer here, so I'm adding it:
"Never use absolute paths unless you absolutely have to. Use relative paths whenever you can. Put your image under the same directory as the Rmd file, and use
."
Using a relative path worked for me where an absolute path did not.