[der Kopf]

I wonder how you can automatically fade out / blend pictures with the background at their borders.

The effect is probably well known. It should be something like the following:

Although smoother and automatically faded. (this is manual).

[art_director]

here's two ways to do what you tried on the dog shot:

static placement of fade:

1. open the shot and draw an oval with the circular marquee tool
2. press command + shift + i (invert)
3. press command + shift + d (feather radius) and select the amount of fade you like. will take some experimentation.
4. set your background color to white
5. press delete


moveable placement of fade:

1. open the shot and draw an oval with the circular marquee tool
2. press command + shift + i (invert)
3. create a new layer and select that layer
4. set your foreground color to white.
4. press command + shift + d (feather radius) and select the amount of fade you like.
6. press option + delete (fill)
7. duplicate the background layer. you will now be able to move the background layer around to place the fade precisely where you like.

note: the background layer is locked so we duplicated it therefore making it moveable and maintaining the original placement.

[SunSeeker]

Alternatively use a layer mask.

Make a selection around the part you want to keep.
Feather selection if required
Click Layer Mask Button on layers palette.

This Mask is fully editable paint on it in black or white to hide and reveal, blur it, adjust its brightness etc

Just put your background on a layer behind, or you could use this technique to make a hole in something for a frame.

[art_director]

there are multiple ways to achieve different looks / effects.