GIF or JPEG?
Choosing File Type

A common misunderstanding is that because the GIF file format has fewer colors (only 256) than the typical JPEG file (which uses a full color palette) GIF is the best format for keeping the size of your page down (less K) and JPEG is the best file type for higher image quality. This is not true. Sometimes an image will not only look better if saved as a JPEG but the file size will be smaller than a GIF version of the same image. On the other hand, sometimes a GIF image will look better than a JPEG version of that same image and it will download quicker (less K). It all depends upon whether the file type chosen is appropriate for the type of image it is used for.

General Rules Regarding File Type Choice:
GIF JPEG
use for browser safe colors- colors that won't dither or change on 8-bit monitors (monitors set to 256 colors). -full color photographic images
-will dither and change when viewed on 8-bit monitors (monitors set to 256 colors).
use when you want a transparency effect  
use when you want to animate images (gif animation)  
use for an image that has a limited color palette or intricate detail that you want to maintain. use for images that contain a broad color palette or a continuous tonal range (with subtle shifts in color).

Indexing an Image to Save as GIF:
3 methods
Gif89a Export
-in Photoshop 5.5: File > Export > Gif89a Export
good for transparency effect
-For transparency effect in Photoshop 6.0: File >' Save for Web' then check transparency option and for Matte choose 'None'
 Image > Mode > Index Color good for tailoring: tweaking the palette, applying selective dithering.
File > Save for Web user-friendly (not good with transparent gifs)