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graphics program

I personally creating all texture paints with Inkscape and the enduser / ingame format converting I am doing with Paint.NET (PSD support / DDS).
as a solid free image editor is usable GIMP, I would say.

special tip: a very usable texture source: http://www.cgtextures.com/
 
Yes, Gimp and Paint.NET are free and Paint.NET handles .dds files natively. I'm fairly sure there's a .dds plugin for Gimp too. Both programs support layers which is something you'll want.
 
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