We previously reported a problem in iPhoto 4.0 where some users' images become blurry - with an exaggerated smoothing effect - when in "Edit" mode. We've since received numerous notes of corroboration for this issue.
The primary pitfall of this issue is that users are unable to distinguish between a naturally blurry photo due to camera problems, or an artificially blurry image due to iPhoto. When images are exported, they do not exhibit the blurriness, indicating that this is strictly a problem with iPhoto's rendering and smoothing scheme. However, a handful of readers have reported similar behavior in Apple's Preview.app. Compounding the issue in this case is the fact that there is no way to turn of anti-aliasing in Preview.app under Mac OS X 10.3.x (Panther).
The blurriness tends to assert itself more in vertical photos, but if you would like to try and reproduce the issue without a vertical photo, try rotating a horizontal image 90 degrees and double-click it (activating iPhoto's "Edit" function). After the image refreshes, you may notice some blurriness. If not, try clicking on the space on either side of the photo to cause "re-smoothing," and the blurriness.
In order to workaround this problem, you can set iPhoto to open images in a new window when they are being edited. This can be accomplished in the app's preferences, and will eliminate the "smoothing" effect that occurs by default.
Barring a more permanent workaround, this issue will likely require an iPhoto update from Apple.