I pointed my user account's default Pictures folder to an existing location on a separate drive (named Pictures). It annoyingly renamed it to "My Pictures" (as it did with my other user folders) so I changed the names back to remove the "My". The shortcuts and libraries updated themselves; so far so good. However if I go to Personalization->Desktop Background and browse my Pictures Library, it shows two locations: E:\My Pictures (which doesn't exist any more) containing the majority of my images, and E:\Pictures (the correct path) containing 5 stray images. The Pictures Library consists only of E:\Pictures (okay, not a very useful library in this case) but viewing it through Explorer doesn't produce the phantom folder location that the Desktop Background view does. The "stray" images that appeared under the correct path were ones that I modified since changing the name of the folder from My Pictures to Pictures, if it's related at all.

Does restarting your computer fix this problem? -Nick