Unexpected behaviour when using 'Center' option for the desktop wallpaper in Mountain Lion
I think they're working as expected. Center puts the image at the middle of your screen, without changing the aspect ratio (an image larger than your screen will be downscaled, but a smaller one won't be upscaled). Because your screen is a 4:3 ratio, and the wallpaper is 16:10, you get blue bars filling the rest of the space. Similarly, Fit to Screen scales the image proportionately so that width matches that of your screen, but it does not change the aspect ratio, which is why you still have blue bars.

If you want the image to take up all of your screen without any blue bars, try the Fill Screen or Stretch to Fill Screen options. Fill Screen scales the image proportionately so that it fills the entire screen, and Stretch to Fill Screen scales the image to fill the screen, but changes the aspect ratio so the entire image is on-screen (i.e. you don't lose any of the image boundaries).