This can happen if the picture file does not match the size of your screen. For example, many home computer monitors are set at a size of 1280x1024 pixels (the number of dots that make up the image). If you use a picture file smaller than this, it will be blurry when it is stretched out to fit the screen.
You can right-click your wallpaper and choose Personalize, then go to the Desktop Background section to choose another method, such as repeating the image in tiles, or only showing it centered with a color border.