vignette, or soft fade, is a popular photo effect where the photo gradually fades into the background, usually in an oval shape. By using Photoshop's layer masks you can create this effect flexibly and non-destructively.
Open a photo.
Convert the background to a layer by double clicking on it. (Give it a name if you wish.)
Select the Elliptical Marquee tool.
Drag a marquee selection around the area of the photo you want to keep.
Click the "Add layer mask" button at the bottom of the layers palette.
Click on the layer mask thumbnail in the layers palette.
Go to Filter > Blur > Gaussian Blur and make sure the Preview option is checked.
Adjust the radius until you are happy with the amount of fade and click OK.
Add a layer under the photo and fill it with the desired background.
You can paint in the layer mask with shades of gray for other effects. Just click the mask thumbnail in the layers palette to activate it for painting.
The icon next to the eye in the layers palette will show a paintbrush icon if the layer is active, and a mask icon if the mask is active.
If you decide you don't like the effect, simply drag the mask thumbnail to the trash icon on the layers palette and then click discard.
To reposition the vignette, click the link icon between the layer thumbnail and the mask thumbnail to move the mask independently of the layer. Don't forget to relink them when you're done.