Yep, seems a bit odd. I played around with this and find that Moodle is pretty fussy about this image. I am not sure what its logic is. I even tried doing some of this in Photoshop. So far, it's a challenge.
I've tried it with a number of images, and get the same blurring if the image width significantly exceeds 100px.
I wonder if it has something to do with as the text is made smaller, it just naturally has fewer pixels to work with. For example, if I take this image below and simply make it smaller, such as 100x25, it gets blurred. There just are not enough pixels to make it smooth.
