OK some progress to report as a temporary fix.
It looks like when you install the Photo update the relationship between iBooks Author and your photos is broken because the media pane shows no images. I had the same issue as Jelger.
However, iPhoto is still in your applications folder so I tried opening it (as I prefer the ability to organise photos in the old program). To my surprise the act of opening iPhoto seemed to restore a link with Author. So now, when I open Author I get access restored to my iPhoto library and can use my old working method.
Of course, this won't last for ever. Apple will not support iPhoto any more so someday an update might affect it. Also, if Apple bring out a fix to link Author and the new Photo this would break the link I have re-established with iPhoto. I'm also concerned that an update linking Author to Photo will make navigation more difficult. iPhoto has a natural structure for finding images to put in books whereas Photo does not.
Anyway, for the time being everything works again..... I hope this helps.