Check line 20 of your webassist/kfm/configuration.php file. According to the structure you have described, I think it should look like:
$kfm_userfiles_output = '../images/';
My 'Site Settings' consistently puts in the wrong path too.
Your friends over here at WebAssist! These Dreamweaver extensions will assist you in building unlimited, custom websites.
These out-of-the-box solutions provide you proven, tested applications that can be up and running now. Build a store, a gallery, or a web-based email solution.