.tga, .png .blp (you will need to add the extension to the texture name in your code if it's .png otherwise the game will choose .blp if it exists then .tga)
The sides should be 4, 8, 16, 32, 64, 128, 256 etc. pixels (it doesn't have to be square but each side has to be one of those powers of 2 in length).
If you save to a .png you can use
BLPNG Converter if you want to use .blp.