Which version of Knytt Stories do you have? If it isn't the latest one that might be the problem. It could also be an issue with your OS. Finally, there could be something else in your World.ini file that causes the error, or the place where you put the [Custom Object] section.
For what it's worth, I tried the same code and image on my copy of KS and it works fine.
EDIT: it seems that placing the [Custom Object] section at the end of the file, or at least after a room section (like [x1000y1000]) causes a crash. Try moving it at the beginning or right after the [World] section.