Right click on the Background layer in the Layer palette and pick Duplicate.
Make sure the duplicate layer (Copy of Background) is active, then go to Adjust Menu, choose Blur and then Gaussian Blur.
In the Radius field enter a value. For a 3-6 megapixel image choose something around 25; for a Web sized image (i.e. 800X600 or smaller) choose 10. Click OK.
Your image should look something like the one shown here.