Yeah, I have the same problem. Did you find a way to fix it?
All of a sudden, my Win 7 desktop background can only display solid colors, no jpgs anymore. And when I try to set a jpg as the background image through the default image viewer, an error message appears, telling me about some internal error.
PLEASE help! Anyone know what I can do to fix the problem?
Never mind, with a little more diggin' I found the solution for my problem, which also appears to be quite a common problem with Windows 7!
Detailed instructions
Open the following window/folder:
%USERPROFILE%\AppData\Roaming\Microsoft\Windows\Themes\
Then delete the file TranscodedWallpaper.jpg, or replace it with a background image of your choice with the same name, and try changing the wallpaper/slideshow/theme again! It did solve my problem.
If this didn't work, you might have to delete the (hidden) file slideshow.ini as well, though then you'll have to restart your PC. After the restart you're likely free to set a new wallpaper/slideshow/theme.
Good luck!
Big thanks to everyone who posted in the following thread for this solution: Windows 7 Desktop Background Picture won't change. Was working fine, changing everyday, then one day, stopped changing and now stuck on the same picture for 2 weeks.
I found the answer on my Win 7 Ultimate. In the Power Option (Control Panel), under change advanced power settings > Desktop Background settings > was set to pause. Change to available. Everything works normal. The background pictures change as before.
Note, I didn't do anything to change to pause. I believe the change may happen when the monitor is turned off after an hour, as my setup was defaulted on Win 7 install.
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