can't change desktop background

This is Windows XP system. As my title says, I’m facing some problem with my desktop properties. I had set a wallpaper which suddenly disappeared and now I can only see the blue background. No success even after restarting the PC several times. Also when I go to desktop properties to change the same, the only clickable items are color tab or the customize desktop. Browser and preview drop down menu are grayed out.

Do anyone of you have came through this situation? Please provide some fix. Many thanks.

I have a solution for the same but it may vary if you have Windows XP Pro (you dint mentioned your XP edition above). Anyways, if you are using XP Pro, then follow these steps:
1. Start > Run > gpedit.msc
2. Under User configuration > Click [Administrative Templates\Control Panel\Display\]
3. There will be a value named "Prevent changing wallpaper" > Set it to "Not Configured"

If if its not Xp pro, then follow these steps for any other XP edition:
1. Open Regedit
2. [HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\ActiveDesktop]
3. Double click the value named "NoChangingWallpaper" > Set it to 0
4. [HKEY_LOCAL_MACHINE\Software\Microsoft\Windows\CurrentVersion\Policies\ActiveDesktop]
5. Repeat Step 3

Hope it helps.
If the above fails :
Microsoft Method- <url:http://support.microsoft.com/kb/921049/>

What if that value is not there?

I copied a picture into my default folder and then went in through the menu to browse to it - the other picture names appear but the new one does not. Does it have to be a .jpg or can it be a .bmp too?