I found by trial and error that it will just set whatever you see, so if the image is wider than the screen you can move it sideways to determine the part to be saved.
It's a bit hit and miss though since you can only see part of the image, which with the pre-4.4 launcher has to cover a wider area both left and right.
It works better with the new KK launcher (not included by default) because in the new launcher the desktop/homescreen extends only to the right so what you see in the wallpaper selection screen is pretty much what you get, and the old selection method would make no sense.
I can't think of any sane reason that the KK update didn't include a wallpaper selector that matched the launcher that was included by default, but there again there are lots of things about this update that indicate that not enough thought went into it.