I had a camera once (think it was an old Fuji) that had a setting that did weird things like this. No idea why as it was of no use at all. I seem to remember the blurb saying get "creative effects" or some such rubbish! Even my almost new Canon Ixus 800 has a "colour effect" setting which does something similar, though not quite as lary as that!
Might be worth checking all the camera menus to check you arent on any odd settings?? Probably not the answer - Im guessing its a faulty camera...!