In case you are like me and can't afford Illustrator, I have taken tcberry's tutorial Using Illustrator For Smooooth Landforms & CLEAN Lines and jotted down how to acheive similar results using Inkscape.

Open your .png source image in Inkscape:
2008-11-17_135442.png

Since this is a pixelated source, and Inkscape's tracing doesn't have a blur option, you will have to slightly blur the source first.

Select the image, then use the Fill/Stroke dialog and set the blur. This is in %, not pixels, Here I have a blur of 0.3:
2008-11-17_140956.png

Trace Image won't work on a filtered source, so use Edit->Make a Bitmap Copy to create a bitmap version of the blurred source image:
2008-11-17_141141.png

With the new bitmap copy selected, Use Path->Trace Bitmap. I used the default settings:
2008-11-17_141342.png

You can now use alt-mouse-click to select under the new path and delete both the blurred source image and the bitmap copy, as they aren't needed. Here is the resultant path:
2008-11-17_141554.png

As in the Illustrator version, you can save this image right now and export to your favorite raster editor. I'll continue, following the tutorial, but in Inkscape