Have you tried the method I suggested? Making a separate black and white mask image from the original picture, then enlarging both with PhotoZoom and using the enlarged mask version to create the transparency? I'm sure you are familiar with importing grayscale images to create selections and alpha channels in bitmap editors. That should take care of the noisy areas in the transparent portions. If the mask image itself becomes noisy, a little fiddling with the levels control should fix the problem.
If the fringing effect is still present, perhaps you could shrink the selection a bit before filling in the cyan color in the background?
So 8 bit transparency is supported in the game engine. What about the transparency in the original extracted image? Is it 8 bit too? From 256 colors, I would expect only a 1 bit transparency is available. But from mac's last example, it does seem like it is supporting graduated transparency.