Cursor movement with images in IE

Hi
I have ckeditor 3.4.2 on my web page but when I do the following
1. Enter some text, press enter
2. insert an image, press enter
3. Enter some text, press enter
If I then try to move the cursor up using the arrow keys it stops on line below image.
This also happen when trying to move cursor down past the image.
This only seems to happen in IE, firefox and chrome seem ok.

Any ideas on how to fix?

Source of my document is as follows

<p>
This is text above image</p>
<p>
<img alt="" src="http://localhost/corporate/Library/32x32-clock.png" style="width: 32px; height: 32px" /></p>
<p>
this is text below image</p>
<p>
And here is a bit more text</p>
<p>
&nbsp;</p>