(Note: I have solved this problem, but it took long enough that I'm posting question/answer here.)
The Xcode build process "optimizes" my PNGs when building. This isn't usually a problem, but iTunesArtwork being processed in this way causes corrupts it so that iTunes not to be able to show it. How can I prevent this?
You can read more about Xcode's PNG compression here: http://iphonedevelopment.blogspot.com/2008/10/iphone-optimized-pngs.html
While you can turn off PNG optimization/compression entirely using "Compress PNG Files" in your project settings (it's visible only if the project's Base SDK is set to a device SDK, not a simulator SDK), you don't want to do this! Read the link above for details on why, but the gist of it is that the optimization lets the iPhone skip some math that slows down PNG display.
Xcode will only optimize PNG image files that it knows about. To prevent a specific PNG from being optimized, you change its file type so Xcode no longer knows it's a PNG.
image.png
to file
.(This is actually the default when you add a file without an extension, which is presumably why iTunesArtwork doesn't have one. But if you're pedantic like me you checked the File Type setting and fixed it.)