I personally had no issues with this, as I've used Gravatar before, but for the average user, it's probably a little confusing. For the sake of simplicity, I'd probably have it so that avatars could be uploaded.
You'd put an extension limit though, right? No .bmp's or .gif's, please. Bitmaps are probably obvious, but the last thing we need are a bunch of animated dogs jumping through hoops as avatars. :P