You can change the space used when you mouse over an icon by tweaking the
setting in the appearance settings.
Right click the Desktop and select Personalize. Click Window color and
appearance and then Open classic appearance properties. Click the Advanced
button.
In the Item drop down menu, adjust the size of the Icon Spacing (Horizontal)
and Icon Spacing (Vertical) to suit what you want.
That doesn't change the mouse over window that appears.. that just takes
care of the actual space between icons.. which I have set to go where ever I
want them..
There are some other things you can do that make it easier to organize the
desktop icons.
You can adjust the icon size by holding down the CTRL key and using the
scroll wheel on the mouse. You can also reduce the Font type and size for
icons in the advanced settings that I referred to earlier.