This will work (tested)
<?php
echo "<a href=\"#\" onclick=\"$('#two').html('<img src=\'http://willstern.com/web/wp-content/uploads/2011/06/jquerylogo2.png\' />');return false;\">Add an Img</a>";
?>
To escape single or double quotes in php you add a backslash just before \'
\"
see the documentation.
Ah yes and the same goes for jQuery see the documentation.
As you are using jQuery I would recommend that you separate your JS from your HTML a little, you could write the same code like this.
<a href="#" class="add_an_image">Add an Image</a>
<script>
$('.add_an_image').click(function(){
$('#two').html('<img src="http://willstern.com/web/wp-content/uploads/2011/06/jquerylogo2.png" />');
return false;
});
</script>