When you just clump up the texture coordinates before sampling, what happens is that the derivatives go crazy, and the texture sampler selects the smallest MIP map, and everything goes gray or blurry.
You can work around this by adding a significant amount of MIP bias. Alternatively, you can just make the art be pixelated in the first place 
(There are also filtering artifacts, so if you want those crisp lines between pixels in a close-up, additional tweaking is probably needed.)