1. Colours are not added. Displays with higher colour are created from scratch. LCD display's main component is the liquid crystal. Maybe by altering the composition of these crystals or by changing the voltage passed through these crystals, the colour palette is increased.
2. More pixels are always better. Thats the reason why the world is moving from Standard definition to High definition. Nothing can match the sheer detail of high resolution display. Also higher resolution displays usually have high colour palette, so your vice-versa condition doesn't really apply here.
3. VGA can be 640x480 or 480x640
4. Increasing pixel size comes at a cost. The highest resolution currently available for S60 is 352x416 which is 4 times regular 176x208. Still Nokia reserves this resolution for only few phones because it adds a hefty amount to the price tag of the cell. Thats why Nokia prevented using 352x416 in N93 and N95 because there devices are already quiet expensive and a higher resolution can make them obscenely expensive. Currently given the prices of LCD technology, VGA has no chance of appearing in S60. But as prices drop, you can see them even in mid end smartphones.
Adding colours doesn't mean just upgrading your display. The os has to be tweaked as well to make full use of the available colour palette. Unlike nokia which has full control over symbian S60, manufacturers using Windows Mobile can't tweak the os as it can only be done by microsoft. Hence unless microsoft adds support for 262k display, manufacturers can't add 262k or higher colour screen.
5. Colours and pixels are not correlated with those factors. Manufacturers need to implement other methods to enable higher contrast, depth, better viewing angles, etc.