I use Ubuntu Natty, urxvt (with 256 colours), and Imagemagick (display -window root [...]) to set the root window to a picture. When I use the transparancy (-tr) option on urxvt, I get the Ubuntu X login screen background (The pink/purple one) and not the image that is currently on the root window. See picture at the bottom.
Note that the same problem exists if I run gnome-terminal and set its transparency.
I suspect that imagemagick is not drawing on the right X11 layer but I (and google) cannot figure out what the right option is.
Could the problem be with either the xorg configuration or with window composition?

Edit: Added a bounty since either no one is interested or no one knows...
Finally, here is the full command I use in debug mode:
$ display -window root -geometry '-0-0' -resize '1920x1080>' -debug X11 /media/MediaVault/Images/Wallpapers//347852_1257250176_large.jpg
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeStandardColormap/8206/X11
Standard Colormap:
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeStandardColormap/8207/X11
colormap id: 0x20
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeStandardColormap/8209/X11
red, green, blue max: 255 255 255
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeStandardColormap/8212/X11
red, green, blue mult: 65536 256 1
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5588/X11
XImage:
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5589/X11
width, height: 1200x717
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5591/X11
format: 2
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5593/X11
byte order: 0
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5595/X11
bitmap unit, bit order, pad: 32 0 32
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5598/X11
depth: 24
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5600/X11
bytes per line: 4800
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5602/X11
bits per pixel: 32
2011-08-24T15:47:49+01:00 0:00.070 0.060u 6.6.2 X11 display[8318]: xwindow.c/XMakeImage/5604/X11
red, green, blue masks: 0xff0000 0xff00 0xff
2011-08-24T15:47:49+01:00 0:00.090 0.070u 6.6.2 X11 display[8318]: xwindow.c/XMakePixmap/7548/X11
Pixmap:
2011-08-24T15:47:49+01:00 0:00.090 0.070u 6.6.2 X11 display[8318]: xwindow.c/XMakePixmap/7549/X11
width, height: 1200x717
2011-08-24T15:47:49+01:00 0:00.090 0.070u 6.6.2 X11 display[8318]: display.c/XDisplayBackgroundImage/13735/X11
Image: /media/MediaVault/Images/Wallpapers//347852_1257250176_large.jpg[0] 1200x717
2011-08-24T15:47:49+01:00 0:00.090 0.070u 6.6.2 X11 display[8318]: display.c/XDisplayBackgroundImage/13741/X11