how to fade photo to use as background

If you want to reduce the opacity of the photo for use as a background image you'll need a 3rd party image editor or Pages from the iWork suite of iApps. In Pages select the image in the layout and use the Inspector/Graphic pane to reduce the opacity. Then select the lower opacity image, open Preview and use the File ➙ New from Clipboard menu option. Once in Preview do a Save As, saving as a JPG to the Desktop and import into iPhoto as a new photo to be used in the book.

You can do the same in iWeb with the Graphics pane if you don't have iWork.

OT

I think you want to adjust the saturation. (I happen to think that a conversion to a sepia tone and then lower the saturation would do what you want.) Here is where the saturation slider is:

http://docs.info.apple.com/article.html?path=iPhoto/9.0/en/pht6dc704ee.html

Oops, did not notice you were on iPhoto 8. Try these instructions:

http://docs.info.apple.com/article.html?path=iPhoto/8.0/en/6338.html