It's filtering, and mipmapping. Unfortunately this happens in the default setting. You may turn off mipmapping by using the flag 256 for the texture, and maybe there has been a further custom solution to turn off filtering in the past, you maybe can find it with the forum search tool.
But be warned, using flag 256 (that is btw also turning off mipmapping) will make rendering slower, and it will make the object "corny".
There are many good reasons for multitexturing, of course. Be it Lightmapping, or a layer containing an animated texture (I use this for underwater caustics), or a fine grainy detail texture. You could not embed the detail texture in a main texture that was made using photoshop layers as it was suggested before because the scaling of the grainy detail texture is so tiny, much smaller than a single pixel of the other texture. So this way you won't see the details form the distance, but if you're very close to the object, the details become visible, preventing huge texels of the main texture from becoming obvious.
But be warned, using flag 256 (that is btw also turning off mipmapping) will make rendering slower, and it will make the object "corny".
There are many good reasons for multitexturing, of course. Be it Lightmapping, or a layer containing an animated texture (I use this for underwater caustics), or a fine grainy detail texture. You could not embed the detail texture in a main texture that was made using photoshop layers as it was suggested before because the scaling of the grainy detail texture is so tiny, much smaller than a single pixel of the other texture. So this way you won't see the details form the distance, but if you're very close to the object, the details become visible, preventing huge texels of the main texture from becoming obvious.