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 get to this tool in several ways:
In the image menu through
→ → or → .By clicking on the tool icon in Toolbox, if this tool has been installed there (see Tools dialog).
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.