I know that imagemagick (free image script language) can handle PNG16 fairly well. You can have a play with my free (and very simple) terrain generator and terrain viewer. When you page through and find a terrain that you like then hit save and it will save out a pair of images in PNG8 greayscale format. One is 256x mag of the other. You can load the result into the viewer to see it and it will be smooth so I know it works.

http://www.viewing.ltd.uk/cgi-bin/vi...nstant_islands
http://www.viewing.ltd.uk/cgi-bin/vi...dragons_flight