This tool is designed to intelligently weigh the pixel colors of the selection or active layer and reduce the number of colors while maintaining a semblance of the original image characteristics.
You can find this tool from the image-menu through: → → or → ,
      or by clicking the
      
         icon in ToolBox, if Color Tools have been added to it.
      
      icon in ToolBox, if Color Tools have been added to it.
    
This slider and the input boxes with arrow-heads allow you to set the number of levels (2-256) in each RGB channel that the tool will use to describe the active layer. The total number of colors is the combination of these levels. A level to 3 will give 23 = 8 colors.
The Preview check-box makes all changes dynamically so that they can be viewed straight away.