Thumbnail (featured image) of next and previous post is not being properly displayed!

Update: OK. If you get to keep changing the question, I get to delete what I had written before and start all over again.

To be honest, I’m a bit confused about what you are trying to do. Since this appears to be for a single post (based on the comment at the top of your template), it is unclear to me what your first 2 custom loops are meant to accomplish. It looks like you are printing out the thumbnails and contents of all blocks posts that have a location of Work, regardless of what single post you are on. If you simply want to show the thumbnail and content for the current, single post, then just do that.

Note: because the custom loop for the Front Page posts calls the_post(), it is modifying the global $post. I don’t know if your sidebar code is depending on that being the original post or not, but I stuck in a call to wp_reset_query() just in case.

Below is what I think you were trying to accomplish, but I could be wrong:

<?php
/**
 * The Template for displaying all single posts.
 *
 * @package WordPress
 * @subpackage Starkers
 * @since Starkers 3.0
 */

    get_header(); ?>

    <?php get_sidebar(); ?>

    <div id="content">
<?php if ( have_posts() ) while ( have_posts() ) : the_post(); ?>

    <div class="block-1">
            <?php the_post_thumbnail('large'); ?>
        </div>

        <div class="block-2 padding-top">
            <?php the_content(); ?>
        </div>

        <div class="block-2 border-top">
            <?php // Display the thumbnail of the previous post ?>
            <div class="float-left"> <?php
                $prevPost = get_previous_post();
                $prevthumbnail = get_the_post_thumbnail($prevPost->ID); ?>
                <h2><?php previous_post_link('%link', 'Previous'); ?></h2>
                <?php previous_post_link('%link', $prevthumbnail); ?>
            </div>

        <?php // Display the thumbnail of the next post ?>
            <div class="float-right"> <?php
                $nextPost = get_next_post();
                $nextthumbnail = get_the_post_thumbnail($nextPost->ID); ?>
                <h2><?php next_post_link('%link', 'Next'); ?></h2>
                <?php next_post_link('%link', $nextthumbnail); ?>
            </div>
        </div>
<?php endif; ?>

        <?php // Create and run custom loop
            $custom_posts = new WP_Query();
            $custom_posts->query('post_type=blocks&amp;location=Front Page&amp;section=Sidebar');
            while ($custom_posts->have_posts()) : $custom_posts->the_post();
        ?>  <div class="block-3 border-top">
                <h2><a href="https://wordpress.stackexchange.com/questions/9202/<?php the_permalink(); ?>" title="<?php printf( esc_attr__( 'Permalink to %s', 'twentyten' ), the_title_attribute( 'echo=0' ) ); ?>" rel="bookmark"><?php the_title(); ?></a></h2>
                <a href="https://wordpress.stackexchange.com/questions/9202/<?php the_permalink(); ?>" title="<?php printf( esc_attr__( 'Permalink to %s', 'twentyten' ), the_title_attribute( 'echo=0' ) ); ?>" rel="bookmark"><?php the_post_thumbnail(); ?></a>
                <p><?php the_excerpt(); ?></p>
                <p><?php echo get_post_meta($post->ID, "Other_Work", true); ?></p>
            </div>
        <?php endwhile; ?>

        <?php wp_reset_query(); // I don't know if this is needed by the sidebar code. If not, you can delete this. ?>
        <?php get_sidebar('secondary'); ?>
    </div><!-- #content -->

    <?php get_footer(); ?>

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