GIF or JPEG? (PNG is not supported by all browsers right now and is the output created by Macromedia Fireworks.) A simple rule of thumb is to use a JPEG for images and GIF for images that include type. Another way to think about this is that the JPEG is best for a bitmapped image (like a Photoshop image) and a GIF is best for a vector image (like an Illustrator file).

This page shows settings for GIF images.

Which format? Perceptual gives preference to color for which the human eye has greatest sensitivity.
Selective is similar but favors broad areas of color and preservation of web safe color.
Adaptive samples colors from hues that appear most commonly in the image.
Web limits colors to favor the 216 web-safe colors which make the most sense in relation to the image.
(from www.lynda.com)

I suggest using Adaptive when possible. Your goal is to have the highest perceivable image quality with the smallest possible file size.
Diffusion is related to the Dither of the image which takes bands of colors and creates an illusion of mixed color. Dithering is to color much like a halftone is to a continuous tone photograph, it creates an illusion of continuous tone by using a dot pattern. Adding dithering will often improve the look of the image but will increase the file size. By adjusting the number of colors in relation to the percent of dither, a smaller file size and better looking image can often be achieved. For most images, the more colors you choose, the better the image will look (this is obviously not true of a black and white image). A caution, however, the more colors you choose, the larger the file size.

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