I upgraded to MediaWiki 1.20.2 ... File links are still not rendered correctly. Example: a previously (i.e., before the update to 1.20.1/1.20.2) created link like [[File:IMG_3334.JPG|thumb]] is now rendered as [<a rel="nofollow" class="external autonumber" href="File:IMG_3334.JPG%7Cthumb"></a>] It seems like File is not recognised as all. The inner brackets are interpreted as a link to an external resource, and the contents are rendered accordingly.
A later post gives this update:
[Having "file:" in $wgURLProtocols] didn't cause problem until a recent upgrade of the MediaWiki software.... Fixing the last line (the file:// protocol) solved the problem: