Desktop display locked?...help please

I recently noticed that my desktop display feature appears to be locked. I'm able to get a wallpaper from online if i want, but cannot use any other options like browsing for pics within "my pictures" or selecting from the choices of already included desktop backgrounds. Even the options for "stretch, center, tile" are locked. I tried right-clicking a pic and selecting set as background and that didn't work. I also tried right clicking images then going through picture tasks, set as background - which also didn't work. I'm using Windows XP pro with service pack 2.

 

Here's a HJT attachment......

 

I followed the below info. While it did unblock the browse feature it will not change the background to the pic selected.

To remove the desktop.html and restore you wall paperif infected by SpySheriff, open REGEDIT, and browse to: HKEY_CURRENT_USER\SOFTWARE\MICROSOFT\WINDOWS\CURRE NT VERSION\POLICIES\SYSTEM and remove the Wallpaper entry, also broswe to:

HKEY_CURRENT_USER\SOFTWARE\MICROSOFT\WINDOWS\CURRE NT VERSION\THEMES and remove the Wallpaper entry.

THis will restore you "Browse" button and allow you to choose your wallpaper once again.