You can save the image as favicon.gif or favicon.png and change the extention to .ico if your GFX editor doesn't support the .ico format.
Well, .ICO is actually a different file format, so that's not really ideal. Converting it is MUCH better!
FWIW, I've always found it best to save an extra copy of a custom named icon file as favicon.ico and upload that to the server's root too. That's the filename MSIE tells servers to look for by default and adding one can reduce number of "errors" showing up in your server's error log by over 90 percent.
A missing favicon.ico can be 99% of a server's error report, making it harder to spot REAL problems!
Having a favicon.ico file present could, in theory, reduce the server load by a small margin too. Why? One less thing for it to do for every IE visitor! That error triggers the default MS favicon.ico to then be displayed on client side, not server side. I never understood why IE does that by default, but it does.
For a very busy site, that certainly adds up!