Your regedit solution worked for me on my HP Mini Netbook w/ Windows 7 Starter Edition. However, rather than link to another folder (which could could eventually change and thus render the desktop background or wallpaper missing), I decided to link this way on my machine. I found that the original registry value was linking to this file and directory path: %windir%\web\wallpaper\windows\img0.jpg.
Thats the same as: C:\Windows\Web\Wallpaper\Windows or,
> Computer > Local disk (C
> Windows > Web > Wallpaper > WINDOWS
Thus, I chose a really nice image from a few sample photos from my hp cloud drive (a nice dark, redish shot of the Golden Gate Bridge) and copied that over to this windows folder, and then renamed it as img1.jpg. Then I changed the registry value to be img1 instead of img0, leaving the original image in that folder in case of a system restoration (which would still need that file!). In this way, nothing is lost and the new image is much better for viewing icons rather than the light blue background that Microsoft provided, mostly since most desktop shortcuts also have alot of blue and white in them... they tend to blend into the wallpaper, especially around that light hotspot towards the lefthand side.
Thank you for your solution. Worked quite well, at least, for me.