I was just able to select a gif of a black and white cartoon from my hard drive and use it as the background image on my PC. The quality isn't very good and I'd recommend using another format. But, here's how I did it (I also use Windows XP):
Minimize all open browser windows, right click your mouse button to bring up a selector box. Click on Properties. Click on the Desktop tab. Click the Browse button. This brings up a list of directories. Be sure you change the Files of type field (located to the left of the Open and Cancel buttons) from the default of "Background Files" to that of All Pictures. If you don't do this, it will not include gif files in the list. Navigate to where you saved the gif file you wish to use as a background and select it, then click the Open button. Click the Apply button to preview the background image and the OK button to save the change.