Dithering refers to the process of mixing existing colors to create the illusion of another color that is not available in the given palette. There are two types of dithering: pattern and diffusion. Pattern dithering arranges pixels in a rigid pattern.
Original image
Pattern dithering
Diffusion dithering applies a random pattern of pixels, creating a subtle grainy texture to the image and higher contrast than pattern dithering.
Diffusion dithering
If you choose no dithering, FotoFinish creates bands of solid colors using the available palette. The existing colors in the image are converted to their closest match in the reduced palette. This works best for images with little or no gradients. It works poorly for photos, unless you are trying to achieve a special effect.
Closest match no dithering