Is it possible to link the sidebar thumbnail photos to the entries they are posted in, rather than to their full-size versions as they are now? Can the asset id or link and the entry id or link be associated?

There are a lot of asset tags whose current use isn't entirely clear, but I don't see one called MTAssetContext.

[Incomplete thoughts]
I haven't played with the asset tags too much yet, but I'm semi-sure you can't do this. At least not so simply.
For one thing, your question seems to assume there's only one "context." What would you expect to happen if the asset was assigned to multiple entries? At best, you could theoretically get a list of what entries an asset belongs to. The system does track this, though there don't appear to be template tags for using it yet. And then you'd have to arbitrarily decide to only use the most recent one.

Yes, on this site each image asset will have only one context. I ftp site images; these are blog post image uploads by others, and they aren't reused.

I've thought there might be a way to grab the entry-id, use SetVar, and turn it into a link on the known image filename.

But it is Friday, and I may well be too tired tonight to see it all clearly, unscrambled.

The more I think about this, though, the more it would make sense to put time instead towards using Multiblog to aggregate recent photos from all blogs, and link them back to their originating blogs. Multiblog knows what blog they came from, and If the photos are really recent, the context should be near the top of the blogs' main indexes. That would put the reader in the ballpark.

Thanks for thinking about it.

Actually, I was able to figure out how to link assets to entries.

check it out:

Movable Type Related Entries with Images & Recent Assets Linked to Entries

Very interesting. Unfortunately, I'm in an environment where plugins are generally not allowed, so I probably won't be able to get the MTRelatedEntries tag function unless MT makes it part of the default set.

Nice work putting that together, though.

Actually, you don't need a plugin for linking image assets to entries.

My article goes into a couple tips. Part 1 is all you need for linking image assets to entries without the need for a plugin.

It's all just native MT template code.