In iPhoto '11, Choose Share / Set Desktop. That's it. You're done.
iPhoto '09 has a Set Desktop button on the bottom tool bar. If you see that button, click it and you are done. If you don't see a Set Desktop button, read on.
To add the Set Desktop button back to the tool bar, go to View / Show in Toolbar on the Menu bar and choose Set Desktop.
If you still don't see the Set Desktop button, keep reading.
If you have a small screen, iPhoto might not be able to show every button on the bottom tool bar. If there isn't room for all the buttons, you will see a » symbol at the right side of the toolbar. Here is what that symbol means.
If you want more options for your Desktop picture, go to System Preferences from the Dock or the Apple Menu and select the Desktop & Screen Saver panel. On the Desktop tab, you can select from a range of stock photography backgrounds. Your iPhoto albums are there as well. Once you choose an album or a folder, you can check the Change Picture checkbox and your Mac will rotate between the photos in that album or folder.