Open a background image (either in RGB or Grayscale). Press the letter ‘d’ to set your foreground colour to black.
Open the second image that you want to use in your collage. Press the letter ‘v’ to switch to the move tool and drag this image on top of the background image in your original document. Make sure this dragged layer covers (or at least significantly overlaps) the background layer.
Go to the layers palette, and at the bottom of the palette, click on the layer mask icon (it’s the second one from the left). The image doesn’t change, but if you look in the layers palette, you’ll see another thumbnail icon added to the right of your top layer’s thumbnail icon. This represents your layer mask.
Click on the gradient tool, and in the options bar, click on the downward facing triangle and the fly-out gradient picker will appear. Make sure the selected gradient is foreground to background, then take the gradient tool and drag it through the image on the top layer, stopping before you reach the edge of that image. You’ll notice that the images blend together.
You can continue to drag the gradient tool over and over again, until the blend looks the way that you want it. If you see the edge of the image, you’ve dragged too close to the edge or past it. Try re-dragging the gradient tool, stopping about 2 cm before the edge of your image.
If you want more control over how your images blend, you can paint directly on the mask by pressing the letter ‘b’ to switch to the paintbrush tool, choosing a large, soft-edged brush, and painting. When you paint with black as your foreground colour, the background image paints in. When you paint with white, the top image paints over the background. That’s all there is to it!