I'm using the 'Alpha Channel' extension to create smooth round objects which worked fine until I changed from millions of colours to a palette of 256. The Object colours go crazy (solarized or polarized effect) but the images look fine when double clicking on for edits.
I have also tried creating a new application from scratch. I want to use 256 colours to keep the program size down to a minimum. Normal active objects are not effected.
A 256 colour pallette in MMF doesn't lend itself to transparency effects at all really, so it won't produce good results. You'll either have to bump up one colour-depth or not use transparency effects at all.
Alpha channels don't look good on limited colour palettes, naturally. (And there isn't any error diffusion because that would slow things down.) If you really need to avoid 16m colours, go down to 32k instead.