Change OSX Folder Icons (Working on OSX Lion)
Any image can be used to create an icon for a folder. The problem is that you're trying to copy the image from the Finder's preview. Not all images are saved with a preview like that, so you can't always use that as a source.

Fortunately, there's a good way around that. When you copy that icon, all you're copying is the image data. You can also do that by opening any image in Preview, selecting all (cmd+a), and copying. Go to your folder's Get Info window, select that icon at the top right, and paste.

I tested, and this works on Lion.