I had a mod that did this way back in my first phpBB forum in like 2003 and it worked great. I've been looking for one for phpBB3 for quite a while (every few months I check, for the last few years). I can't afford to pay somebody to create a mod that does this, so I'm throwing out the request here.
Basic functionality would be as follows:
Linked offsite avatars would be shrunk proportionally so that it fits within the avatar size limits. For instance, if you have a 1024x768 image you want to use, and the max width is 185px, then it would automatically be resized and displayed at 185x138 using ImageMagick maybe, or jQuery or something (I'm not really a coder, so I'm not sure what the best option would be).
Images uploaded either from a site or the users computer would similarly be resized and saved in that (correct) size.
If an admin changed the max resolution allowed for avatars then the users would need to re-link/upload their avatars. No need for dynamic resizing in that situation (I imagine it would be too complex).
Basically, no more errors when people try to use avatars that are too big, it simply adjusts as necessary.
Also, there would be no up-scaling of avatars smaller than the max, it would ignore anything which fits by default.