NOTE: These instructions are for advanced users, as changing the setting requires applying them to a custom skin.
The blurring effect is controlled by the files located in this folder:
To disable it, open the paper.xml file and change this line:
<boolean id="blurred" value="true"/>
<boolean id="blurred" value="false"/>
That will stop the game from blurring the background but will still darken it.
You can change the darkness level by editing the paper.png files located in that file, make them more transparent to lighten the effect, or you can change the colour by changing the colour name on this line in the xml file (or by changing the colour value in the settings file):
<colour id="red_replacement" name="dialog_background"/>
Credit: Michael Murray