2) Use one from gallery - If you want to use a picture in your gallery go to it and open that picture. In the upper left corner click the box that says actions. This will drop down and then choose make profile picture.
Cropping - When you upload a picture the option to crop it for your avatar will come up. Go ahead and crop it. This smaller image will be used around the site. This is part of what helps speed the site up by uploading smaller images.