Squirrel mail is a TEXT email client so it will only show newsletters in text format. If you send a multi-part email which sends both a HTML and Text version of the email, only the text version will show up in Squirrel mail and the embedded images will be shown as attachments.
That is the default behaviour of all text email clients.
If you'd like to test your email in a text based email client, you can use Mozilla Thunderbird to emulate a text email client by:
View | Message Body As | Choose Plain Text
To switch back:
View | Message Body As | Original HTML

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