I'm not sure whether or not these work in Photoshop, but I'd do one of the following:
1: Use a white circle with a huge glow radius with the blend mode "Erase" on top of it. Seeing as Photoshop makes you do all that layer crap, that option might be a pain for you.
2: Make a similar circle or glow, but color it black this time. Then copy it ands use it as a greyscale mask for the image that you'd like to fade out of existence. This is assuming that Photoshop supports negative masks (which set portions that don't exist as opposed to portions that do, indicated by a black mask).