I don't believe .ico
image formats are supported by Silverlight.
From the Image.Source
MSDN:
Silverlight does not support all image formats. See BitmapImage for information on the types of image sources and formats that can be used for an Image.
On that BitmapImage
page:
The BitmapImage can be used to reference images in the JPEG and PNG file formats.
This is different than the Image
control used in WPF/Windows8 which does appear to support .ico
files.
Unfortunately, I think you'll have to try converting your ICO file to a PNG or JPG.