Pixlr ^[1] is an online editor with all of the expected tools, brushes, and layer/canvas options.

Picnik ^[1], of course. I'm surprised no one mentioned it yet. Quite feature rich, features import from many services plus desktop. Give it a try.

I highly recommend Aviary ^[1].

Features:

Rich editing toolset
Edit your images with undo and redo, brushes, magic wand, and blend modes.

Powerful layers
Work with layers, groups, and layer masks. Intuitive drag and drop interface.

Splashup ^[1] has layers as well as facebook/flickr integration.

Photoshop Express was announced ^[1] some time ago, but appears to have been place behind a logon wall ^[2] (click the Online Editor image/link in the middle of the page).

This is a copy of Microsoft Paint using the <canvas> method (so it won't work with Internet Explorer 8 or previous):

http://canvaspaint.org/

I haven't used it though & I'm not sure if it is meant as a programming demonstration rather than an actual picture editor.

I use SumoPaint, Flash based and very straightforward, can open an image from any URL.

www.sumopaint.com/app ^[1]

Aviary Phoenix ^[1]

Lifehacker's Hive Five winner (July 5th, 2009) with 31% of the votes. ^[2]

Aviary Phoenix is an image editor that is part of the Aviary Suite of online editing tools, which—on top of image editing—boasts a vector and filter editor, among other tools. Aviary Phoenix has an advanced interface and plenty of options to help you edit your images, like layers, blending, and magic wand selection. You can use Aviary without signing up for an account, but with an account you can save your creations, collaborate with other users, and otherwise participate in the Aviary community. The Aviary Phoenix Firefox extension, called Talon, adds in an assortment of functionality like screen capture, quick editing of images you find online, and—unique among the Hive Five candidates this week—it adds support for pressure sensitive input devices. The premium version of Aviary Phoenix is available for $25 a year and unlocks advanced features and the ability to save your work to your Aviary account without adding it to the public area of the Aviary community.

http://www.picghost.com/

Mass image editor! Edit your images online quickly and easily and also for FREE! With PicGhost you can edit all your images online, no software or installations required.

Features:

Upload multiple images at once (max 20).
Select images to upload from your computer or website.
Apply effects on some or all of your images.
Process multiple images at the same time.
Resize your images using very simple settings.
Protect your images by adding text and watermarks.
Preview all images after upload and before download.
Download all images at once in a zipped file.
Process images from any computer, no software needed.
PicGhost proudly provides all these features for free.
No Pro version, or hidden fees.
More image editing features are coming soon.

cloud-canvas.com ^[1]

From Lifehacker:

If you've been interested in using a web-based image editor but you've found them slow or too tied-down to plugins you might not have access to everywhere you want to work, CloudCanvas is a fast HTML5-based editor that frees you from plugins.

CloudCanvas is an image editing tool that sports some interesting features we'd love to see integrated into traditional editors. You can work with vector and bitmap images, import files in JPG, GIF, and PNG from both online and offline sources, and save in PNG and SVG formats. CloudCanvas integrates with Google Docs so all your files can be saved securely there and imports images from the Open Clip Art Library, Google Images, and Deviant Art.