Wallpaper is blurry when cropped from downloaded image
Why don't you try another image editing application?  I mainly use PhotoWonder, but there's also Photoshop Express.  Both have their issues, but I haven't noticed low quality results with them.  The Nexus S wallpaper size is 960 x 800, so you can make them that size and then use them without having the Nexus S editor do any cropping.