You can use JPG, GIF or PNG images.
the image block is generally used for banner areas as a simple way of add an image to cover a whole area.
You can also achieve very basic hover effects using two images.
Image - Choose the image you wish to add from the file manager (How do I upload files?)
Image On-state - Achieve a simple hover effect by choosing another image to be displayed when the users mouse hovers on the image.
Image links to - Another page (provides page selection tool), External URL (provides text field to enter a url to link to)
Alt Text/Caption - Enter an alternative text description for the image, This is good for SEO and people with screen readers.
Max width - dictate the width of the image by inputting a pixel value here.
Max height - dictate the height of the image by inputting a pixel value here.
Scale image - Image will scale down to width or height entered in the boxes above. Or select Force Exact Image match to keep the image at its original size and dimensions.