I can think of some ways to improve this:
1. Ignore paint.net's restrictive rules of the palette system, namely the 96 color limit. Instead, allow reading more colors from the .txt file; for example, if the .txt file contains 256 lines, it should read 256 colors from it.
2. When there are fewer than 96 lines in the .txt palette file, the plugin adds white to remaining entries. This can produce unexpected results when the .txt palette file has no white. It should treat this .txt palette file as if it actually had fewer colors.
3. What formula do you use for the difference (picking the color with the lowest difference)? I bet it's rederror+greenerror+blueerror or sqrt(rederror²+greenerror²+blueerror²). Also, when many colors tie for the lowest difference, it chooses whichever color appears last in the palette. Please allow an option so that when many colors tie for the lowest difference, it chooses whichever color appears first in the palette. Also, please allow custom weights, so that when the user types 30, 59 and 11, the difference formula is 30×rederror+59×greenerror+11×blueerror. Also, please allow choosing between Manhattan distance (x×rederror + y×greenerror + z×blueerror) or Euclidean distance (sqrt((x×rederror)²+(y×greenerror)²+(z×blueerror)²)).
4. Remove that weird Interpolate thing. It is not that useful; even worse, it is on by default.