You haven't enough space on your C drive. Skydrive needs both space for the new image and some space in the c:/SkyDriveTemp directory to Synch. It seems you only have 58GB on C: drive and only 1GB free.
Can you post a picture of disk management like the one below - perhaps you could extend the partition as Dell 3521 specs indicate it normally has 500Gb.
If not we'll have to look into deleting something but your C: drive is VERY full.
Well you need as much more space as the amount of stuff you want to save. You should also have 15% space free so if you have 86GB you should make the C: 100GB. Otherwise defrag will not work properly.
Alternately you can move Skydrive onto another partition with more space. Right click and then click on move.