Apparently it is possible. From what I see you have to open your browser and go to facebook. Once you log in, scroll down on the main page and select "Photos". Once in the "Photos" section, you should see the option "Upload Photos" in the middle of the screen. Once in "Upload Photos", there is going to be a confidential e-mail address that is for your own personal use and should not be shared with anybody. Apparently you upload photos by sending your pictures via e-mail or mms with a picture or video attached to the confidential e-mail provided to you by facebook.
From what I see, no you cannot attach photos to hotmail. I am not sure about GMail, since I do not have an account. To the best of my knowledge, MMS does cost money. I believe that the pictures are small because the LG Gossip is not a smartphone (Blackberry, iPhone, etc.) and uses mobile internet. Basically it is the same as using the internet on a regular cell phone. Although it looks like a smartphone it does not have the capabilities of one. More than likely the pictures' size has been reduced to meet the capabilities of the phone.