Version:           3.4.1 (using KDE 3.4.1, compiled sources)
Compiler:          gcc version 3.3.4
OS:                Linux (i686) release 2.4.29

The context menu option "Set as Background" (kdesktopSetAsBackground.desktop, this leads me to kdesktop setWallpaper function) don't care if the image is in a local file or in a remote folder. As using remote images for background doesn't work, trying to set such image as background results in a background with no image.
KControl checks this and issues a message if the user picks a remote image.

Test case: Open a remote folder (I used smb:, I guess fish/sftp/ftp should do the same thing), right-click an image, set it as background.

The alternatives (I think) are:
Change the servicemenu so it become kioslave-sensitive (I'm not sure if it's currently possible)
Check the url in setWallPaper, issue an error if it's not local.
Check the url in setWallPaper, manage it gracefull if it's not local (e.g. copying the file automagically to the local filesystem)

I know this is a small, stupid issue, but everything is an advance. And I could fix kdesktop myself and send back a patch if somebody points the expected behaviour.