Cannot Change the Desktop Wallpaper – Fix

To restore the ability to change the desktop Wallpaper in your system, download the file wallpaper_enable.reg for Windows 2000/XP/Vista systems, and save the file to your Desktop. Right-click wallpaper_enable.reg and choose Merge to apply the settings.
The REG file removes the Wallpaper Policy setting from the following registry locations

HKEY_CURRENT_USER \ Software \ Microsoft \ Windows \ CurrentVersion \ Policies \ System

HKEY_LOCAL_MACHINE \ Software \ Microsoft \ Windows \ CurrentVersion \ Policies \ System

Windows Vista specific setting
Click Start, Control Panel, Ease of Access, Ease of Access Center.
Under Make things on the screen easier to see, deselect the option:

Remove background images (where available).

Select Save.
You should be able to change the desktop background now.