I did this in the GIMP, so I can only give explain exactly how you could do this in The GIMP ...
So here's how I did it:
1) load an image, now you have one layer, the background
2) make a copy of the background layer (right-click on the background layer and select duplicate layer)
3) Make sure this new (duplicated layer) is selected and apply a gaussian blur to it (filters>blur>gaussian blur). A 5px radius is okay.
4) Add a layer mask to the same (duplicated and now blurred) layer. Right-click on this layer and select 'add layer mask', you'll get a pop up screen that asks you which color the mask should be, choose black (transparant).
In the layer, channel, pads window you'll see a black box next to the layer preview of the duplicated layer, this is your layer mask. If there's a white rectangle around it, this means it's selected and everything you do is applied to the mask.
5) Make sure the layer mask is selected and draw a white rectangle. You'll see that where you've drawn the rectanlge, the blurred layer will become visible.
If you want to colorify it, do the following:
1) add a new layer and fill it with the color you like
2) set the layer mode to 'color'
3) add a black layer mask
4) select the layer mask of the duplicated (blurred) layer, press CTRL+A (select all), then CTRL+C (copy), then select the layer mask of the colored layer and press CTRL+V.
Eventualy, you should end up with something like this:
[attachment=488:blur.png]
ps. The process is exactly the same for photoshop, except some things might be in a different location and might have a different name.
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