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Yes if u unlock bootloader u will lose contacts, apps and everything. So perform a backup first.
To get the blue LED (fastboot mode) you need keep the volume up key pressed and connect usb to phone.
Yes flashtool is must, you can't unlock bootloader without it. Yes you may download Android SDK or just download the Android_with_usb file from the XDA tutorial page link. Either will do.
P.S. If you want me to do it for you over Teamviewer I would be glad to help. PM me with your teamviewer ID and pin.