Below is a post from the Picasa Newsgroups. Onion is a really wonderful, knowledgeable contributor to the Picasa Group.
I think it is a common misconception that picasa actually makes copies of images, or somehow is one level away from the actual folders on your disk. Not true, as Onion notes below in this message thread.
From: JohnAlex
Subject: Remove from Picasa Index
How do I remove items from the Picasa index without affecting their
storage on my disks? Thanks for the help
From: Onion
Subject: Re: Remove from Picasa Index
Picasa is a photo organizational tool, with basic editing features.
Picasa does not physically store your images. They are all located on
your hard drive. Picasa just scans your hard drive, looking for any
images, and then creates a thumbnail reference to them. This means
that if you delete a photo in Picasa, you are deleting it from your
hard drive.
Go into the Folder Manager under Tools and change your settings for
what Picasa watches.

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