Try this,
PictureBox picToDelete;
modify this function.
private void ClickImage(Object sender, System.EventArgs e)
{
ImageToShow = ((System.Windows.Forms.PictureBox)sender).Tag.ToString();
PictureBox picToDelete = (PictureBox)(sender);
}
private void btnDELETE_Click(object sender, EventArgs e)
{
panel1.Controls.Remove(picToDelete);
File.Delete(ImageToShow);
MessageBox.Show("The image is deleted successfully...!!!", "Information", MessageBoxButtons.OK, MessageBoxIcon.Information);
}</pre>