Slight blurring is a byproduct of the compression.
Imagetool uses a different algorithm from the nVidia code that I use. With some images it gives better results and with others worse.
If you really have to have DXT3 rather than uncompressed alternatives like 32 bit then you can still use imagetool for the final conversion. Do your designing using DXTBmp and then save out as Targa. Imagetool can load a targa (with its alpha channel) and you can then save in DXT3.
DXT formats are different from normal formats because all modern graphics cards have hardware support for decompressing them on the fly. The final display of the texture is controlled by the card and driver. Different cards and drivers may give slightly different visual results with DXT
