Photoshop-help needed...

instead of doing alpha channel stuff, you can double click on a layer to bring up the blend menu on a layer. From there you can apply something like "inner glow" or "inner shadow" to get your dithering effect around the edges.

You need to do something called "feathering".

To feather an image, make sure that you are on the marquee selection tool. (the dashed-line box). In the toolbar at the top there should be a place where it says: Feather: with a box beside it. In the box should be the number zero, which means that any selection you make with this tool will be feathered by zero pixels; in other words, not at all.

Change that zero to something else, say 60. (This will be trial-and-error, since I don't know your image size or resolution.) Now try making a selection by dragging a box around the area you wish to feather. Notice that the corners of the selection box are rounded?

Now that you've got a selection, Copy the selection, then Paste it onto its own layer. Turn off the background layer and you should see the feathering effect. Try different settings on the feather effect until you are happy with the amount of "fade" you achieve.

Make sure to return your feathering setting back to zero when you want to make a normal hard-edged selection.

Is this what you are looking for?

~Josh

Also true in InDesign, and iirc, Illustrator (the layers can come apart there), at least under CS.