Can anyone clarify if the GDI StretchBlt function for the workstation Win32 API performs bilinear interpolation for scaling to both larger and smaller imag
HALFTONE mode performs a very blocky halftone dithering on the image, based on varying the conversion thresholds over a defined square. I have never seen a situation where it would be considered the best choice.
COLORONCOLOR is the best mode for color images, but as you've seen it doesn't give great results.
GDI does not support a bilinear mode (except in Windows Mobile CE as you discovered). The naive implementation of bilinear does not do very well when shrinking an image, as it simply tries to interpolate between two adjacent input pixels without trying to draw from a larger area.