EmmaDouble - I had the exact same problem with mu2.8.6, just cleanly installed.
I checked the ownership of the folder, and it actually did assign the wrong owner, so I logged in as "root" and reassigned the user and group to the same user and group as the rest of the folders (stay logged in after this).
chown [user] blogs.dir
chogrp [group] blogs.dir
I then created a folder (in FileZilla, my FTP program) named "1", and changed it to "777"
Then I tried uploading it again, and received the same message you received:
"The uploaded file could not be moved to the upload folder."
Within the "1" folder, it created a folder called "files".
I went back to my "root" login and reassigned the user and group again.
chown [user] files
chogrp [group] files
This fixed it.
I just hope I don't have to do this for every MU blog added... we'll see.