how about not symlinking at all? that sd card might be vfat and not ext2...
It doesn't matter what filesystem the
real file is on, but the symlink itself can only be created on a "native" filesystem (ext2/ext3/reiserfs/etc).
besides, its a squashfs and needs to be mounted and can be mounted from anywhere...
Strangely, I have my image on CF, I have a symlink to it in /home/root/, then I mount it using the symlink as image. I'm pretty sure there is a reason why I did this but right now I can't remember what that is.