I wrote about it some time back, but admittedly it's hard to find this info. Here it is:
It's a little tedious to link photos from Picasa, you need to do this:
1. On the menus on the right when viewing your photo, look for "Link to this photo", click on it to expend the menu.
2. Select the size you want to embed, eg. 400px.
3. Copy the HTML code under "HTML to embed in website". It should look something like this:
<a href="http://picasaweb.google.com/genghk/RandomStuff/photo?authkey=blDdICSftxU#50949011611218XXXXX"><im g src="http://lh5.google.com/genghk/RrS5nLJkLjI/AAAAAAAACEM/l5dSG8cdVO4/s400/IMG_XXXX.JPG" /></a>
However, all you need is the second string of "http://lh5.google.com/yadayadayada...". What I do is copy the whole chunk from Picasa first, then paste it into CS's "Insert image" dialogue box, then trim it down to just what's between the second set of quotation marks. That should do the trick for you.