To Change the Icon spacing on your Desktop:
1. Right-click on the desktop
2. Choose Properties from the popup menu. On the Appearance tab look in:
* For Windows 98: The Item list box. Once you find Icon Spacing (Horizontal) and Icon Spacing (Vertical) you can choose different values.
* For XP: The Advance > Elements list. Once you find Icon Spacing (Horizontal) and Icon Spacing (Vertical) you can choose different values
3. Once you are satisfied hit OK.
4. Press F5 to Refresh the Desktop
In fact you can find there some other options, in case you like to try them.