How to select images from my Desktop in Keynote?
I had the same problem, but couldn't get it to work over this dialogue. It's kind of weird that you can only use images from Library Files over that button.

The solution is to go to "image in the "Format" band on the right of Keynote. There is another button to "replace" the image. You can choose any file from there...

Hope that helps, since I'm from Germany I don't know the exact denotations in the English version. If you cannot find the right button, just let me know ;)