its optional.. its just an icon that you can see on the address bar.. there's alot of free online tool where you can create favicon..
I recently noticed that as well. For me, I have several sites on one google account. With the favicon, I can distinguish my websites more clearly on the main menu of webmaster tools. I think that is the whole point...
no, the favicon uses a .ico extension. Search for "create favicon" on goggle . I came across this website: http://www.favicon.cc/
lol, I was wondering when someone was going to bring this up. Mine are all listed except a few which I deleted and are replaced by a cool little Globe, I should steal it