Hmmm.... and I thought you had designed it that way! I am no good with that kind of stuff, but the go to guy is certainly Rick, from Rick and Paulette's RV Travels!
Hopefully Rick will jump in here with an answer. Somehow my header picture turned into this huge picture of the girls and I couldn't ever figure out what to do with it, so that's the way it is.
I am having the same issue...as I just changed mine today. I am hoping someone jumps in with an answer
When I export our picture in Picasa I resize it so that it fills the header of the Blog. A few test ones until I got the right size. Good luck!