do you want to display just image border? or shrink background color border?
I am using 4.1.1 so code is for version of fashion mosaic that released for 4.1.1.
Edit :
Here is what I had used for 4.0.18 to remove image background.
Code:
{* $Id: product_thumbnail.tpl,v 1.14 2004/06/24 09:53:29 max Exp $ *}
{if $config.Appearance.show_thumbnails eq "Y"}[img]{if $tmbn_url}{$tmbn_url}{else}{if $full_url}{$http_location}{else}{$xcart_web_dir}{/if}/image.php?productid={$productid}{if $file_upload_data.file_path}&tmp=y{/if}{/if}[/img]{/if}
to set your border width, just change border="0" to number you like.