Part of the problem I think is that the "regexp" attribute of
"xsl:analyze-string" allows attribute value templates so you either have
to double curly braces or better declare your pattern as a parameter or
variable before the element e.g. using Michael's suggestion

 B  <xsl:param name="pattern"
as="xs:string">\{\{image_[^}]+\}\}([^{]+)\{\{/image\}\}</xsl:param>

<xsl:param name="pattern"
as="xs:string"
expand-text="no">\{\{image_[^}]+\}\}([^{]+)\{\{/image\}\}</xsl:param>

otherwise the use of expand-text="yes" higher up the tree causes the
same problem you run in with using the regular expression in the attribute.