UPDATE:

I see in web server error log:
Code:
[error] PHP Fatal error:  imagepng() [<a href='function.imagepng'>function.imagepng</a>]: gd-png:  fatal libpng error: zlib error in /home/my_account/public_html/my_shop/includes/classes/captcha.php on line 214

The segment of relevant code from the class file:

Code:
if($this->img_type == 'png') {
	imagepng($this->img, '', (int)$this->quality);
} elseif($this->img_type == 'gif') {
	imagegif($this->img, '');
} else {
	imagejpeg($this->img, '', (int)$this->quality);
}

So for testing I changed image type (Config > Captcha) from png to jpeg and try again... but image still does not display in browser. However this time different message in error log:

Code:
client denied by server configuration: /home/my_account/public_html/my_shop/includes/templates/my_template/images/index.php
Does this last error indicate a possible htaccess mod-security issue?

How to change to gif? Config > CAPTCHA in the admin provides png and jpeg options but don't see how to set gif image type.

Woody