JPG files are highly compressed and can have artefacts DDS is a DirectX texture file and is designed for game engines (PNG can be used) I am no expert but you can find more information in this thread
https://forum.game-guru.com/thread/210176
Also if you are using JPG files I don't think they support transparency
in fact I am positive they don't
Transparency Modes for the FPE are
0 - first-phase no alpha
1 - first-phase with alpha masking
2 and 3 - second-phase which overlaps solid geometry
4 - alpha test (only render beyond 0x000000CF alpha values)
5 - water line object (seperates depth sort automatically)
6 - combination of 3 and 4 (second phase render with alpha blend AND alpha test, used for fading LOD leaves)
7 - very early draw phase no alpha
Transparency must be in the Alpha channel of the _D texture either PNG or DDS I have had success with transparency in a PNG texture I usually only use 5 in my FPE's
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