How do I use a Saved Search as a Desktop Background Folder?

I want to use my movie library's Posters and Artwork as a cycling background. The problem is movie managers place each movie in a folder, and then a subfolder for artwork (jpgs). And choosing a Folder for Backgrounds is not recursive.

In Finder I ran a search for ‘type:image’ then saved that as "Movies.savedSearch".

Then in the Desktop & Screen Saver preference pane, I tried to add that folder, but it won't drag-n-drop, and if I hit the + to select the folder, it is greyed out / not accessible.

Any idea how to get this to work?

This isn't possible. Smart folders are saved as .savedSearch and aren't real folders, so you can't add them to lists requiring folders.