In regards to your background image, you should make it only 1px high and then repeat it. In regards to the shadow finishing at the bottom, the only way to fix this is by adding an image to the bottom, say 10px high, with a rounded drop shadow on the corners. Like - http://clients.perthweb.com.au/ertech/ (I work for the company who made this site - I did the cut-up) Notice that the rounded drop shadows are actually part of the image itself.
That is how you get the desired effect.