I managed to make it work with hardcoded path:
{thumb file="images/T/t_70.jpg" longside="850" link="false" hint="false" overlay_position="$overlay_position" overlay="$overlay" sharpen="$sharpen" html="class=\"$class\" alt=\"$product|escape\""}
but it does not work with dynamic path:
{thumb file="tfile" longside="850" link="false" hint="false" overlay_position="$overlay_position" overlay="$overlay" sharpen="$sharpen" html="class=\"$class\" alt=\"$product|escape\""}
Any clues?
My product_thumbnail.tpl
{* $Id: product_thumbnail.tpl,v 1.19 2007/04/19 06:55:36 max Exp $ Custom mod *}
{strip}
{* Strip out http prefix from Full URL *}
{if $usertype eq 'A' || $usertype eq 'P'}
{assign var="tfile" value=$tmbn_url|replace:"`$http_location`/":"../"|replace:"`$https_location`/":"../"}
{else}
{assign var="tfile" value=$tmbn_url|replace:"`$http_location`/":""|replace:"`$https_location`/":""}
{/if}
{if !$class}
{assign var="class" value=""}
{/if}
{if !$sharpen}
{assign var="sharpen" value="true"}
{/if}
{if !overlay_position}
{assign var="overlay_position" value="9"}
{/if}
{if $config.Appearance.show_thumbnails eq "Y"}
{if $tmbn_url}
{thumb file="images/T/t_70.jpg" longside="850" link="false" hint="false" overlay_position="$overlay_position" overlay="$overlay" sharpen="$sharpen" html="class=\"$class\" alt=\"$product|escape\""}
{$tfile}
{*$tfile|replace:" ":""*}
{*$product.tmbn_url*}
{else}
<img {if $id}id="{$id}" {/if}src="
{if $full_url}
{$http_location}
{else}
{$xcart_web_dir}
{/if}
/image.php?productid={$productid}
{if $file_upload_data.file_path}&tmp=y{/if}
"
{if $image_x ne 0} width="{$image_x}"{/if}
{if $image_y ne 0} height="{$image_y}"{/if} alt="{$product|escape}" border="0"
{if $align} align="{$align}"{/if}{if $class} class="{$class}"{/if}>
{/if}
{/if}
{/strip}