The same happens when manually adding Art to a file and have it saved to the folder.

Not sure if it is a bug, but added as: http://www.ventismedia.com/mantis/view.php?id=9004

I should've provided more detail:

The only thing I wanted to get was the album art. I was using Amazon US.
From the top part of the window that opens, the only thing I checked was Cover. Everything else is unchecked.
In the bottom pane, everything is left check.

When I click the Auto-Tag button, The dialog settings are as following (didn't change a thing, those were the default values):
Image Type: Cover(front)
Image Location: Save image to file folder
Image Filename: folder.jpg

The result is that files gets modified. The album-art isn't embedded, just the vorbis comment section gets re-written, or something of the sort.
Hope that's enough detail to recreate.

[u]The relevant settings[/u]
Under options->Library->Tags & Playlists:
Image Location: Save image to file folder

Edit: I'm currently using build 1465

Are you perhaps tagging Art and have it set to embed. I just tried with Auto-Tag from Web with Amazon (US) and only let Label be updated and the files themselves weren't update.

However when also tagging Art and have it embed as expected the files were modified.

In settings, I have "Update tags when editing properties" unchecked. I don't want MM to modify my files.
When I modify tags manually it works as expected: Only the DB is updated, files left untouched (= gets out-of-sync).

But when I tried using the "Auto-Tag from Web..." feature, it modified my files.
That's not cool. :o