If you want to prevent too many compression artifacts in your Vista or Windows 7 wallpapers you save you images to the place where Windows stores them manually without using the Set as Desktop Background feature. In my computer this folder is in C:\Users\
My User Name\AppData\Roaming\Microsoft\Windows Photo Gallery.
Try to find that folder and store your wallpapers there yourself manually. In my case (Vista) when I right mouse click on the desktop I select Personalize and I choose Desktop Background and right there I get this folder and you can see its location when you click the Browse button in the window that appears. Just click in the address bar above and you will see the whole address to that folder and you can even create a shortcut on your desktop to take you to that place directly to make it easy to put other wallpapers there in the future but if you want to you can just copy & paste a wallpaper right there in that folder that appears after you clicked on the Browse button. As for what format to use in that folder I found that it works with .jpg only as far as I know cause if I put a .png image in that folder when I click the Browse button I don't see the picture so I use the .jpg format to put wallpapers there.
Do this and then normally select any image that you manually placed on that folder as a wallpaper and voila! your artifacts will be gone.