Latexit will have a preamble and a postamble of its own which you can access through its preferences (Edit > Preferences)

The standard preamble contains a \begin{displaymath} and the postamble \end{displaymath}:

Hence if you add \begin{equation} and \end{equation} in your code, you will get an error:
! LaTeX Error: \begin{document} ended by \end{displaymath}.
See the LaTeX manual or LaTeX Companion for explanation.
Type H <return> for immediate help.
...
l.11 \end{displaymath}
! Extra \endgroup.
<recently read> \endgroup
l.11 \end{displaymath}
Remove \begin{equation} and \end{equation}, you get the result:

PS: Since the equations are exported as images from latexit and inserted elsewhere, I feel that it is not a good idea to use equation number (which is inserted by equation environment) and a label. It is better if they are included in the main document. However, for your own reasons if you want them, replace \begin{displaymath} with \begin{equation} in the preamble and \end{displaymath} with \end{equation} in the postamble of latexit.
align(which means that everything you write is between\begin{align}and\end{align}. If you selecttextit works. – Manuel Dec 15 '12 at 13:51