Use the JPEG image format, size 600x800 pixels and use the Firefox browser to upload to the Amazon DTP.
*UPDATE on the Internet Explorer incompatibility issue, see end of this post.
Don't expect the image as it displays on your Kindle screen to be beautiful, no matter how beautiful it is in full color.
The Kindle, at this point in its development, displays only 16 levels of gray-scale, so it is not capable of doing justice to your nice color cover.
Make sure your book looks good on Amazon's website, and don't worry about the Kindle display... yours will look no worse than others.
On the way to this conclusion:
If the weeping and wailing on the Kindle forums is to be believed, the upload of the Kindle cover has probably caused more problems than all others put together.
The answer, it turns out, is very simple and easy, but it's not so easy when you start out, as many do, with the wrong information.
The size of the image is the first and most confusing factor... the Amazon instructions don't clarify the problem, and many users, trying to help, just add to the problem with the wrong numbers.
The Kindle re-sizes any image that is LARGER than what its internal algorithm wants... that LARGE image gets displayed SMALLER than a SMALL photo that meets the internal specs.
An image sized 1200x1600 pixels, which many people think should make a great cover image, will get re-sized so it fills about half the screen.
The same image sized 600x800 pixels fills the entire screen, top to bottom, edge to edge, to make a beautiful cover.
There were other ideas put forward... and I tried most of them, only to get messed up final results.
There's another factor... *Internet Explorer and the Amazon DTP apparently just don't like each other.
Most of the upload problems reported on the forums are solved simply by switching to another browser. I've tried it, myself, with Internet Explorer 8, and a squeaky clean cache, and IE8 simply sits there... it won't even try to upload the image.
Bottom line... use JPEG format, 600x800 pixels, and upload with Firefox.
*UPDATE on the Internet Explorer incompatibility issue. It can be cured in IE8 by clicking Menu|Tools|Compatibility View.
It was a real issue that caused problems for many, and will continue to cause problems for those unaware. That's the reason I'm leaving the problem descriptions in this post.