I m not deeply test my LX3,just "cincai" take some photo,poor skill,just see see can liao

U need to have manual controls (M settings).
Basically what is required for such an effect are 2.
  1) A wide aperture setting (e.g. f/2) for close ups (foreground in focus, background blur) or a small aperture 
      setting (e.g. f/8) for far away subjects (foreground blur, background focus).
  2) Manual focus / selective focus.

Most compacts don't have manual controls, but you can achieve similar effects by using macro mode.
Hope my noob comments help.
Let the pros teach u more 

Personal opinions:

1) Camera features:
Basically from what i see, if u r really interested in knowing (or getting seriously into) photography, I suggest you get the LX3 (or something similar with aperture, shutter and manual focus controls). These makes a lot of difference in terms of camera performance and helps bring out the creativity in you (by manually determining how a photo should look).

2) Size:
The LX3 is thick (even if u considered the lens, u still have a lens cap). So trousers pockets are out of the question. But it can still fit into a jacket pocket. But personally, I never put my camera into my pants (even my old FX01). I always handhold my cams, so the extra size makse not much of a difference to me.

3) Price:
If budget is a really big constraint for you, then go for the FX520. But for me, If I have that little extra to spend, I'll spend it to get something better. I am not thinking of changing my cam within 1 or 2 years so, if that little extra spent can give me something that lasts, why not? 

4) Zoom:
Handheld, anything more than 3x zoom for me is pointless. Your handshake will make it virtually impossible to take a clear picture. So unless u r planning on using a tripod very often, the 5x in the FX520 is not something very useful. Some advice from our fellow Lowyat forumers: Take the LX3 if u wanna take photos of babes, take the FZ28 (18x zoom) if you wanna take photos of monkeys and birds.  After using the LX3 for 2 weeks, I believe that the 2.5x zoom is enough for most applications.

5) ISO:
Don't expect the ISO performance of the LX3 to be anywhere close to DSLR quality. It is STILL a compact. Anything more than ISO-400 is still bad. But since the LX3 comes with a faster lens, you basically are able to get brighter, clearer pics at lower settings (e.g. With the same shutter speed and aperture, you can get a clear shot with the LX3 at ISO-400 whereas you might need to use ISO-800 on the FX520, which is very noisy).
Hope my noobie comments can help you 
It all comes down to your personal preference really.
But of course, I hope to see another LX3 member soon though.
hahahah....