As photos and other media become a bigger part of Twitter’s strategy in the future, it can’t have this kind of thing completely at the mercy of a service owned by a competitor.
Instagram’s being able to simply yank Twitter’s ability to embed images inline on their site and apps is far too much control for Twitter to be comfortable with. Makes sense to me. And, as Marco said, I hope it is this reason and not to try to hurt Instagram. Because that wouldn’t work.