Actually very simple, just go to the address on the web where your picture resides.
Now you can Right click the image and go to properties, it should now display the images url. Copy the url.
Now that you have the url to the image click the "My Space" link above, go to Profile.
Now you are in your profile page scroll down till you see
Avatar / Picture URL:
click Edit your avatar.
now click custom Avatar and paste the url in the text box, now click preview, after you like what you see click "Select This One"
All done.