[NBJack]

Dithering can be applied to any palettesd imaged; in the earlier days of the net, restricted color palettes could indeed help reduce size. Dithering however can interfere with run length encoding (RLE) compression used in certain formats (i.e. GIF, or the ancient PCX).

As I understand it, JPEG compression does not play nice with dithering as it is based on a matrix of discrete cosine transformations. Smooth transitions from one color to the next are much easier to compress this way than highly detailed features (i.e. a series of small dots due to dithering). For example, if you blur out parts of a photo, you will likely get a smaller image at the same compression level as the original. In other words, dithering basically creates a much harder image for the JPEG algorithm to compress.