yes you can, as long there is an advertiser wanna put their banner or link on your blog, but you need you blog on good traffic and PR of course... congrate dude...
Of course, there is nothing prevent you from doing so, and like what robyries said you need good content, traffic and pr. And you can make your blogspot more professional looking by changing the default template and losing the subdomain they gave you by linking .com domain ( this is for free they don't charge you for that ).
Technically you are not supposed to, but I don't see how you will be caught. The bigger question is will anyone buy ads on a free hosted blog that you do not own and have no real control over ? The answer to that is probably a big NO. Especially not for any real money. Besides, you will need traffic in the thousands per day to even begin to have anything to offer a private advertiser and there is no reason to build up that kind of traffic on a free hosted blog, when technically you could loose it at any moment and all of your hard work and your income.
I've found that if you're in certain specialized niches you have a much better shot of selling advertising, even with a free hosted blog. My friend had a PR2 personal poker blog that didn't get THAT much traffic, but he got contacted by some online poker sites and sold them sidebar links. Wasn't too much money, but it can be done without having a massively popular blog. It probably helped that all of his content was good and unique and he had a genuine following of other real players...
yes my friend you can direct sell ad space in blogspot. but need a good traffic, PR and lot of hard work. coz finding a advertiser for a free subdomain is too hard . better you try some adverting network.
I don't think you are allowed to sell advertising space on your Blogspot-hosted blog. You can place AdSense ads (which is built in to the free Blogspot if I remember correctly) but no other ads. You don't have enough control over the blog, not like when you have your own domain and hosting.
Agree with the above posters with just inserting adsense codes. To further that, insert the codes wihn the blog content & play with the colors to make them look like actual internal links to your site which will increase the chances someone will cliek. You can also sell text link ads on the site as long as you don't make it too obvious -- i.e. no large signes that say buy text link advertisements here.