Tanweer is correct, this is pulled from the portal.properties directly --
#
# A file extension of * will permit all file extensions.
#
dynamic.data.mapping.image.extensions=.gif,.jpeg,.jpg,.png
Note that the comment is giving the same direction that he did. I just tried in on my side and it worked, so most likely there is something you are not doing correctly.
Another place you can set it is in Control Panel > Server Administration > File Uploads > Web Content Images section. You might want to try there as that setting my be taking priority over the portal-ext setting.
The only other alternative that could be done (though overkill considering there is a property to achieve what you are trying to do) would be to create a struts action hook and override the logic of the Save action to skip the image test. It could be done, but that would mean that the property would no longer have any effect -- could be confusing to future maintainers.
