I'm probably wrong, but perhaps the folder that Windows is getting the files and folders to display on the desktop from has been deleted or changed.
By default, this folder should be:
Windows XP - C:\Documents and Settings\YOUR-NAME\Desktop
Windows Vista/7 - C:\Users\YOUR-NAME\Desktop
If that folder doesn't exist, try creating it and restarting your computer. See if your desktop works then.
If it still doesn't work, or the Desktop folder is already there, try this:
(By following the steps below, you agree that only you are to be held responsible if you damage your computer. Editing the registry can be dangerous, but if you carefully follow the steps below, you should be fine.)
1. Press
Winkey + R to open the
Run dialog.
2. Type in
regedit and hit enter.
3. In the left pane, open up
HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Explorer and click on
User Shell Folders.
4. You should see a list in the right pane, with Names like (Default), AppData, Cache, etc.
5. Under
Name, double-click on
Desktop.
6. In the text box labeled
Value data, make sure that it reads
%USERPROFILE%\Desktop (I'm not sure if this is different in Windows XP). If it does not, go ahead and change it.
7. Click OK and exit the registry editor.
8. For the change to take effect, you'll probably have to restart your computer. Go ahead and do that now.
See if your desktop works then.
That is the only thing I can think of. I will try to recreate your problem by messing with my registry to see if I can get results that match the problem that you're having.
EDIT: I just tried changing the value specified above in my registry, but even if I specified a folder that didn't exist, some form of a desktop still showed up. I never got any "unavailable cursor" like you're experiencing. Sorry if I'm not of any help. :/ And by the way, instead of restarting your computer, you should be able to go into task manager and end the explorer.exe process, go to File > New Task, type in
explorer and hit Enter. The changes should take effect then.
Good luck to you

dRastic