Janette, I think the eraser you're using may be too "hard."
What I personally think is the key to blending is "feathering," blend modes, layers, a big "soft" eraser and a mostly solid well textured paper similar in color to your pic. I'm just going to list what I do and then if you have any questions just fire away.
1)Choose the marquee tool and set the feather to 200. (that's as high as PSP goes) I usually just use the rectangle. I select almost all of my photo and then go to "selections" and select "invert." Then I hit delete, this will feather the outside of your pic. I usually hit delete at least twice, sometimes three times depending on the look I'm going for. Sometimes you will see a line on the outer edges (from where the original line of the pic was), you can take care of that with the eraser later but I usually select each outer edge with a feather of about 20 and hit delete (I don't invert these)
2)Now the fun part, playing with blend modes and opacity! There's no science to this really, you just play with it until you like it. On the Atlantis LO, I duplicated my feathered layer twice. I set the bottom to "hard light" opacity around 70%, the next layer "soft light" opacity around 30-40% and the third layer to "darken" at around 20%. (link your layers so if you want to move it around they all stay together)
3)Select a "big, fluffy" eraser. In PSP the one I use is called "fuzz soft." I forget what program you use but rather then looking solid it should look like a ball of cotton. I hope that makes sense. I make my eraser around 300. On the Atlantis LO, the blue of the sky was too bright and I wanted to soften it up. What I learned was not to drag and sweep the eraser but tap and click, overlapping as I go. The idea is not to erase it all but to "blend" it. On this particular LO I tapped and clicked on different spot on different layers so some was left on one layer and gone on the other. When I added my kids watching the ride I placed it over the ride pic and then just tapped around until they looked part of the pic. The Rapids LO was two pics as well, I just kept tapping until I liked it. Sometimes you have to hit undo a lot but that's the beauty of digital!
I hope this makes sense. It sounds like a lot but it really is easy once you get in a groove. Any help I can be let me know!