I think the context helps a bit here.
On page 407 of the link you gave, Luther says, "On the subject of images, in particular, we saw that they ought to be abolished if they are going to be worshiped, otherwise not, although I wish they were abolished everywhere because they are abused, -- it is useless to deny it. For whoever places an image in a church, imagines he has performed a service unto God and a good work, which is downright idolatry."
...
"But this is not sufficient reason to abolish, destroy and burn all the images; and why? Because we must admit that there are still people who have not the wrong opinion of them, but to whom they may be useful. Although they are few, yet we cannot and should not condemn anything which is still useful to the devotions of any man. But you should have taught that images are nothing, God cares nothing for them, and that He is not served, nor pleased when we make an image for Him, but that it would do better to give a poor man a gold-piece than to give God a golden image, for God has forbidden the latter, but not the former."
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"Now, although it is true, and no one can deny that the images are evil because they are abused, nevertheless we must not on that account reject them, nor condemn anything because it is abused. That would result in utter confusion. God has commanded us not to lift up our eyes unto the sun, etc., that we may not worship them, for they are created to serve all nations. But there are many people who worship the sun and the stars. Shall we, therefore, essay to pull the sun and stars from the skies? Nay, we will not do it. Again, wine and women bring many a man to misery and make a fool of him. Shall we, therefore, kill all the women and pour out all the wine? Again, gold and silver cause much evil, shall we, therefore, condemn them? Nay, if we would drive away our one worst enemy, who does the most harm, we would have to kill ourselves, for we have no greater enemy than our own heart, even as Jeremiah says, "The heart of the man is crooked," or, as I take the meaning, "always twisting to one side or the other." And what good would that do us?"
"He who would blacken the devil must have good charcoal, for he, too, wears fine clothes and goes to the fair. But I can catch him by asking him: Do you not place the images in the churches because you think it a special service of God? and when he says Yes, as he must, you may conclude that what was meant as a service of God he has turned into idolatry by abusing the images; he eagerly sought what God has not commanded and neglected God's positive command, to help the neighbor."
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"Therefore I freely admit, images are neither here nor there, neither evil nor good, we may have them or not, as we please. This trouble has been caused by you; the devil would not have accomplished it with me, for I cannot deny that it is possible to find some one to whom images are useful. And if I were asked about it, I would confess that none of these things give offense to me, and if just one man were found upon earth who used the images aright, the devil would soon draw the conclusion against me: Why condemnest thou that which is still useful in worship? This challenge I could not answer; he would have successfully defied me. He would not have got nearly so far if I had been here. He played a bold game, and won, although it does no harm to the Word of God. You wanted to paint the devil black, but forgot the charcoal and used chalk. If you would fight the devil, you must be well versed in the Scriptures, and, besides, use them at the right time."
