Your mouse arrow must start over one of the icons on the top right of the screen for this to work. Press CTRL, click on the icon you want and then drag the mouse. Might take a few tries when you first do this to get it to work as it's not completely intuitive.
> Magnifying glass icon is used to resize > 4 directional arrow icon is used to move
CTRL + dragging over either the magnifying glass or movement widget at the top are the only controls that work when resizing or moving the background image.
Image can be any format so far as I know. Most of my background images are 1280x800 pixels (same size as my monitor screen), but I often work with other screen ratios so I regularly need to resize or shift my backgrounds.