>>> My thoughts exactly. Why is the trademark so important to them?
Because it would protect them from Twitter going after them for infringement on Twitter's trademarks. I'm sure Twitter knew they had no argument for the "Likelihood of Confusion" Test and TwitPic would've been granted its trademark in due time.
From a legal perspective, it looks like Twitter felt if they got trademark protection, they wouldn't have any leverage to sue them to get them to stop treading on their business. Instead of mounting a legal defense in the courts, they simply used what leverage they did have and threatened to cut them off from their API - which is everything for TwitPic.
For you non-legalese folks:
http://marklaw.com/trademark-glossary/confuse.htm
"The terms, "confusingly similar" or "likelihood of confusion" both refer to the standard required to prove infringement of a trademark. Specifically, if the relevant consuming public will likely be confused or mistaken about the source of a product or service sold using the mark in question, then likelihood of confusion exists, and the mark has been infringed.
The likelihood of confusion test is also one of several examinations conducted by the U.S. Patent and Trademark Office in determining whether to approve an applicant’s trademark application. It is worth noting here that even if there is no likelihood of confusion, i.e. no trademark infringement, you may still be liable for using another company's trademark if you are blurring or tarnishing their mark under the state and/or federal dilution laws."