Further research finally led to a solution:
(found on: http://ubuntuforums.org/showthread.php?t=609005&page=2)

I deleted the XDG_DESKTOP_DIR-line from ~/.config/user-dirs.dirs,
installed xdg-user-dirs, ran xdg-user-dirs-update, logged out and in
again and everything was nice and dandy - again. My Desktop is no longer
/ but ~/Desktop.

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Desktop displays root directory (/) after upgrade from Gutsy to Hardy
https://bugs.launchpad.net/bugs/174532
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