I hesitate to believe Litestep is actually the problem, too.

I just finished testing on a win98SE machine (all updated) that had never previously had Litestep on it. I installed it, the RC3 update, and then uninstalled it (using the shortcut). It did change my "center" setting to "stretch" and left it there after uninstalling, but I had no problem going in to properties (right click the desktop) >> backgrounds, and returning it to "center."

If you have any important details to recreating the "error," I'd be more than happy to test it out.