Changing Folder's Icon
I've had a similar problem in the past.

First, open the file you want to use as an icon in Preview. Select all, then copy.
Close Preview.

Navigate to the folder whose icon you want to change. Go to File-> Get Info. Select the icon at the top left of the info window and paste. The folder's icon should be changed.

Basically, by copying the image directly from Preview, we don't have to worry about how the image has been saved and whether the image's icon is a generic one or a rendered preview (which was likely the problem originally).