Unable to search for photos in Spotlight.

"Images" in preferences is referring to a set of file types (jpg. tiff. gif, etc.) that should be included in your Spotlight results, not a particular folder. It doesn't really matter what the folder containing images is called as long as the files have the correct extension that will be recognized as belonging to the image set of files.

Spotlight Preferences now recognises 'Images' and I'm unable to change it back to 'Pictures'.

As I said before there is no "photo" file type, just a bunch of other kinds (tiff, jpeg, GIF, and maybe 20 other possible extensions) that are used for photos. I don't think Spotlight uses the term "Pictures", just "images". I have a "Pictures" folder but in Spotlight I just see "Images" in the search results, and "Images" is what is uses in the preferences.

this doesn't explain why I'm unable to search for photo files using Spotlight.

Make sure that the area containing your photos is not excluded from search by the privacy feature in Spotlight's preferences.

Spotlight searches for text information. For example, I have lots of photos, but spotlight only find a single one since I don't use the word "photo" in any of my file names or folder names. The one file it finds has "Created by Adobe Photoshop" in the metadata - Spotlight is keying in on the word "photo". If I type in the word "Picture" it finds the Pictures folder, but doesn't list the contents since none of those have the word "Picture" in their names or text within the file.

What exact search term are you entering into Spotlight? Are you sure that a file exists with that term in its name, or perhaps in text included within the file?

Try resetting or redoing the Spotlight files with Spotless...

http://www.versiontracker.com/dyn/moreinfo/macosx/26842