Photoshop CS5?
Create a layer mask, in that mask create a rectangular selection where you want the image to show, then Select > Modify > Smooth to give rounded corners.
Press Ctrl + Shift and I to select the inverse, and fill it with black.
The black areas will show the layer below the photo, and you can then blur or soften the mask to suit.
This way you don't need to erase any of the image, you just modify the mask to suit your intended final output.