You add the image control just like any other control in your DataList. What is the problem you are having?
To refresh the UpdatePanel you need to trigger it in some way. Add a hidden button, either within the UpdatePanel or outside (and set the Triggers for the UpdatePanel). Use JavaScript, like setInterval, to automatically click the button.
window.setInterval(refresh, 500);
function refresh()
{
$("#refresh button id").click();
}