Sorry if I'm gonna repeat what other ppl said already, I'm bored at school (stupuid free periods) so I want something to pass the time

Just for you, I'll have a look at this this afternoon when I get home.
Same as the textured background, palette entries 176-208 (thnx Unknown ). Any tileset with a working textured background has working 8-bit water.
http://www.jazz2online.com/articles/view.php?id=74
I'll get all technical here. FF is the hexidecimal (is it hexidecimal? I always forget) value for 256 (255 if it starts at 0 because 0 is also a value). It is used in colours a lot, I'm pretty sure just about everyone knows that when they make a colour for a tileset they use it in values between 0 and 255 (example: 255 red, 135 green, 46 blue). This is how web colours work, its divided into 3 hexidecimal values put next to each other. The example above in hexidecimal will be #FF872E. Notice that Red is the first two, green is the middle two, and blue is the last two hexidecimal values. The '#' symbol just tells whatever is using the colours that its a hexidecimal value, always put it in front or it wont work. Now with that bit of info to backme up,I'll actually start answering your question:
Reply to question starts here, ignore above if you're lazy:
The Jazz colour 'FF' refers to the palette entry 256. I'm pretty sure it wont work and will give you a screwy colour. You're welcome to shove in a colour in the very last palette entry and stick it somehwere in your tileset and see what happens. I'm not sure myself, just 'theorizing'
The bottom pink ones are fine, I always stick my own colours in there, BUT the pink colours in the top should be left out. I know loads of ppl are gonna tell you that theyve used them before and their tileset works fine, but thats because they didnt use all the bottom palette entries. Excluding the original Jazz 2 palette, JJ2 only supports 160 extra colours (128 excluding your textured background). There are exactly 160 empty palette entries under the original Jazz 2 palette, so theres no need to use the top ones.
http://users.surfanytime.co.uk/disguise/TTM32.zip I use this, its amazing. The zip comes with a tutorial and loads of example textures.
http://www.geocities.com/alister_j_t/PalSuite/Index.htm You want palsuite, but that's not the answer to your question. You see, palsuite ONLY edits palettes. Don't get me wrong, it's the best palette editing program this world has to offer, but it does NOT draw. If your PSP Trail ended Palsuite is not the answer. However, there is a drawing program out there that will solve your problem. Its called GIMP, you can grab it at http://www.gimp.org
N0body makes tilesets with it () and from what I've seen it does an amazing job at tilesets aswell. It's Linux based, but there is a windows edition, I hear it crashes a bit but it's free and the best there is to offer that I know of.
As smooth as it gets. You can start with any colour and end with any other colour, but the difference between the colours have to be the same. Say for example you're making a black to blue textured background and the colours have a difference of 7 between 2 colours next to each other, the gradient could look somehting like: 255 blue, 248 blue, 241 blue, 234 blue, 227 blue, 220 blue, 213 blue etc. etc. etc.
Palsuite mentioned above does an AMAZING job at making gradients for textured backgrounds. Just put in the first colour, put in the last colour, select them and all the colours inbetween and press the Gradient button. VOILA! JOB DONE! You have a PERFECT smooth gradient. One of the main reasons I use the proggy
Yes, you can have less than 32 colours in the textured background, but there is a catch to this. ALL of the 32 colours in the textured background area MUST be in your tileset image. Ever seen those lil gradient blocks in my tileset? That block has all the colours of my textured background if the background itself doesn't have 32 colours (most of mine use around 24 colours). And make sure the colours in your background are actually the ones in palette entries 176-208.

Phew, done, hope that helps