You get the “Error updating thumbnail” when you crop and NextGEN Gallery tries to save the thumbnail.

The solution is to set your permission to write (/over write) on file level.

If you are using DreamWeaver:
1) Connect via ftp to your site
2) On your server navigation down to your thumbnails (default in wp-content/gallery/galleryname/thumbs)
3) Select all your thumbnails
4) Right click and select Set Permissions…
5) Set values to 666

When you manage gallery you can edit thumb of each picture. But you do not even get the cross to crop the image.

This is what you have to do:
1) Dashboard -> Gallery -> Options
2) Select Thumbnails
3) Check Set fix dimension