I forgot to mention another registry fix that you can try from
that web site, line 142 right hand side, Allow
Wallpaper/Background changes:
http://www.kellys-korner-xp.com/xp_tweaks.htm
Beyond that, I'm stumped. Whenever I've seen the type of
behavior you've described it's been caused by an item added
through that "Customize Desktop" option I mentioned earlier.
The fact that you can change the background color from the
Desktop tab sort of goes against that theory.
The best I can give you is some things to check to see if you
can narrow down the possibilities of what's causing this
problem.
1. The first thing I would try would be to see if the same
thing happens when you log on with another user account. If
yours is the only account on that computer, create a new
account that you can delete after you've run this test. Log in
with the new account and see if you get the same results when
you try to use an image file as wallpaper. Reboot your computer
to see if the picture stays displayed.
2. Log back on with your account. Open up some image files that
you have stored on your machine, right click on the picture and
select "Set as Desktop Background" from the menu. If it works,
reboot and see if the picture is still displayed.
3. Disconnect from the Internet. You don't want to be connected
when you try the following procedure because you're going to
have to shut down your antivirus protection.
OK, now go to Start ->Run and enter msconfig in the Open box.
Click OK. Click on the Startup tab. Remove the check mark from
each item listed. Close the System Configuration Utility and
reboot. Note: You'll see a notice about the computer running in
Diagnostic mode. Put a check in the box and click OK each time
you see the warning. If the picture you want to use as your
wallpaper remains displayed, run msconfig again except this
time put a check mark in the box next to the first item listed
on the Startup page. Reboot and see if the picture's still
displayed. Keep adding back items until you find the program
that's causing the problem.
4. Check any security related programs (antivirus, antispyware,
etc.) that you have running on your computer to see if there is
a setting that may be blocking certain file extensions from
being run on your computer.
Finally, if you haven't done so already, you might want to post
this question to an XP newsgroup that sees more traffic than
this one. Here's two that might be worth trying:
If you decide to post to both groups, do yourself a favor and
crosspost, don't multipost. If you're not familiar with the
concept, take a look here for an explanation:
Why and how to crosspost
http://www.cs.tut.fi/~jkorpela/usenet/xpost.html
Good luck
Nepatsfan