1. There are small 8x8 Neat-O ones too, but I guess you saw that later.
HARDCORE: You cannot manually draw any sprites to "make them bigger". You can SSPR them, or simply DOUBLE sprites in both directions, not adding any new information.
EASY: Manually sizing up platforming type tiles is okay for use with Neat-O, but you might just double them and wait a few days... ahem....
2. Not 128x128, but they have to use the chunky pixel sprites, so might 2x, 3x, 4x scale them. No need to adhere to 128x128 if not in Pico-8.
3. You can use anything in the files. The original jam was one sheet but I did add some with the ARG. I've just been adding more as I go. I may add a SUPER HARDCORE that only allows use of the new set of gfx, but then I need to make a for-sure decent one-sheet that is great. Even though there are more gfx, the spirit is that you just use one spritesheet even if you cobble it together.
I hope that answers a few things!