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Make sure you're in rich formatting mode, or it won't show up. Click the little image icon, and you can insert images in two ways: by uploading image files from your computer or providing image URLs.
If you're sending mail to other Gmail users, they'll still have to click "Display images below" or "Always display images from ..." to see images you embed.
Read the complete post at Official Gmail Blog: New in Labs: Inserting images.
Waiting for your feedback on this new feature.
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