We’ve seen a number of tutorials explaining the use of LCD displays with Arduino. In most the display contrast is varied by use of a potentionmeter. Here’s a tutorial from Hobbytronics which varies the contrast using PWM. A 100uF capacitor is connected between the PWM output and ground to smooth the signal. Using this technique allows you to code contrast changes into your sketch, such as allowing contrast to automatically vary based upon the value read from a LDR. Sample Arduino sketch included.