[PlasmaKrab]

From what I have seen until now, yes.

Look at the SHPed help file in the 'Shp Files' seection on more info on how it works. Basically put, where a bitmap image pixel is coded in 256 shades of green, red and blue (16 million colors), this coding is replaced in the shp compression by a reference to the color number in the palette.
There are no other colors in the game than that in the palette, so I guess your answer is yes.

But since you can edit these images to the pixel, the result can be pretty detailed anyhow!