If the shadows was rendered, then you might want to do a couple of different things. Instead of casting on a flat plane, sclupt the plane to simulate the bumps/curves of your terrain in the background image. In the attributes for the light, increase "light radius" to get softer shadows. Also adjust the lights decay rate to get that fall-off I mentioned before. Quadrautic decay seems to be the most accurate to real life. If this is all too much, in PSP, run a blur and distort the shadow and fade it with a big eraser.