A client of mine reported this bug in 10.2.8. I thought it was fixed in Panther, but I was able to reproduce it (10.3.5). Can anyone else confirm this?
1. Open Desktop & Screen Saver in System Prefs, then click the Desktop tab.
2. Try to set a solid color for your background, while you have a picture selected that's smaller than your screen resolution. You'll need to have the "Center" option selected to position the picture.
When I try this, I can't get my changes to stick, and I always get a dark blue background. Trashing the plist file doesn't help, either.