I will use 2 pictures: ò the side of a mountain, ò the side of the Bellagio hotel in Las Vegas.
First you will make a new stage and fill it with white, then add the pictures (make sure they are on seperate layers) and position the layers over top of each other like so:
Then change both layers opacity to 30%:
Then choose the eraser tool and set it to 30 px width and choose the one with soft edges (not solid)
Carefully erase the layers where they meet at the center:
Then make both layers opacity 100%:
Then select the move tool (arrow tool) and move the top layer over top of the bottom layer until it looks like the images are merged:
The other very common way to do this is to use a layer mask. Simply place one picture on top of the other then click on the layer mask button on the bottom of the layers palette and then use the gradient tool to draw the mask (which actually fades the picture from full opacity to no opacity). You will want to see FAQ229-1962 for more information on how to use a layer mask.