I initially tried it in Vue 5I, but then I loaded up Vue 4 and tried it again, and it also worked fine. No special settings; a 256x256 terrain, picture loaded with 100% in blend mode.

I don't know why it would produce that result. If you want to make the scene file available, zipped of course, I'm happy to download and try it here. (Please remove any included 3rd-party content first though.)

Steve