Having gotten my Gallery to work again, I can clarify that in the initial Gallery view you tap-and-hold, then "Set As", then "Reader Wallpaper". If you've clicked on an image so it's full screen, just tap the image and you'll see a "Set As" action in the top left corner. Tap that and select "Reader Wallpaper".

Seems to work very nicely: the image is scaled proportionally to fully fit width or height.