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On the menu bar click select and refine edge (thats if you have CS3) use the controls to feather/grow shrink the select.
If you dont have cs3 I think feather/grow shrink are on the menu.
Now click delete on your keyboard.
clean up, if need with the eraser tool
something like that ;)
Many don't realize a channel can be used to save selections. So, with the two layers in place, create a new channel. Go into that channel and create a gradient on the diagonal, it will be only in black and white grayscale.
Now go back into RGB and select Select->Load Selection from the main menu. In this dialog box, select the channel you just created (Alpha 1 if you didn't rename it.) This will load the channel's gradient as a selection. Now press delete. :-)
Don't forget to delete the channel before trying to save or you'll only get .psd or .png as the formats.