I managed to "break" the desktop folder on our macbook. I'm not sure exactly how it happened, but I'd started to copy an application to the desktop using Terminal, and then thought it wasn't working so quit the copy. Every time I clicked on the Desktop in the Finder, the Finder would thrash and other applications became uncooperative. Clicking on Desktop in the home folder or in the sidebar led to the message that 'there is no default application to open the document "Desktop"...,' which was rather worrying. I managed to copy the folders on the desktop to the home folder, so it was empty but still broken, and anything saved to it would go who-knows-where.
I was thinking I might have to do an archive-and-install, which would have been a pain, but then I remembered seeing Apple's article on how to change a user's short name, which involves copying the files from one home folder to another. So I created a new user 'test' and got to work.
Here's how I solved it, while logged in to the troublesome account. In Terminal, I ran these two commands (where myuser is the short username for the troublesome account):
$ sudo cp -R /Users/test/Desktop /Users/myuser/Desktop
$ sudo chown -R myuser /Users/myuser
This would, of course, delete anything left on the desktop if it wasn't empty, so use with care (have you backed up lately?). I could probably have used cp in Terminal to copy things out of the desktop first, if it wasn't empty already. I'm not sure what caused this problem, but this has solved it. Possibly it was some sort of permissions problem, or the Finder was seeing the desktop as a package from the failed copy command.
Mac OS X Hints
http://hints.macworld.com/article.php?story=20071004054943929