We consider the image reconstruction problem when the original image is assumed to be sparse and when partial knowledge of the point spread function (PSF) is available. In particular, we are interested in recovering the magnetization density given magnetic resonance force microscopy (MRFM) data, and we present an iterative alternating minimization algorithm (AM) to solve this problem. A smoothing penalty is introduced on allowable PSFs to improve the reconstruction. Simulations demonstrate its performance in reconstructing both the image and unknown point spread function. In addition, we develop an optimization transfer approach to solving a total variation (TV) blind deconvolution algorithm presented in a paper by Chan and Wong. We compare the performance of the AM algorithm to the blind TV algorithm as well as to a TV based majorization-minimization algorithm developed by Figueiredo et al.