Selecting an appropriate web-based format for your images is the first step towards optimized web graphics. GIFs, JPEGs, and PNGs are the formats used to display images on the Web. Each has its own strength and weaknesses.
In general, palette-based or index-color formats like GIF or PNG are best for flat-color art like buttons, logos, or cartoons. For smooth-toned images like photographs JPEGs are usually the best choice. However, there are exceptions.
Resource: HTML Goodies Website
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