We have analyzed the image formation and dynamic properties in laser speckle imaging (LSI) both experimentally and with Monte Carlo simulation. We show for the case of a liquid inclusion that the spatial resolution and the signal itself are both significantly affected by scattering from the turbid environment. Multiple scattering leads to blurring of the dynamic inhomogeneity as detected by LSI. The presence of a nonfluctuating component of scattered light results in the significant increase in the measured image contrast and complicates the estimation of the relaxation time. We present a refined processing scheme that allows a correct estimation of the relaxation time from LSI data.