Not if the image is local.
But if it's remotely stored it works, as this code proves:
<img src=" http://farm4.static.flickr.com/3345/3337320567_b1f2a62dbb_b_d.jpg"/>
I ran into a similar problem and wasn't able to find a way to have regular Flex components (like Text and TextArea) display <img> tags in their htmlText. Everything works find in a web-based Flex application, but once the same code was used in AIR, the images just wouldn't display.
I changed my display to use the mx:HTML component and everything worked fine (I was using only external images).