I was receiving the same "Error creating thumbnail! Error code: 127" issue for Imagemagick, although I was using the settings that my server just emailed me to use:
I switched the settings to temporarily used GD2, but I read on this forum that GD2 does not produce the same quality of images as Imagemagick....
Any ideas as to how I can get imagemagick working again?
(I started experiencing this problem after I upgraded servers, but my webhost tells me that the above path is correct.)
Thanks for your help,