The file size limit is set in the server's PHP configuration file. Check phpinfo for post_max_size, and you'll see that this is probably set to 2MB. This couldn't have been changed from simply upgrading PP, so you'll want check with your web host to see if they made any changes recently.
As for the page spinning its wheels when you try to upload a photo, you'll want to check all your addons. The most common cause of problems after an upgrade is incompatible addons. Shnohose posted some troubleshooting steps for incompatible addons here: http://forum.pixelpost.org/showthread.php?t=6428
. In this case it's probably an admin addon causing the problem so start there. Upload a photo with just the core addons, if it goes through successfully, it's one of the other addons causing the problem.