When switching colour mode to indexed, the first colour in the palette is unusable. Well, it pretty much just turns into an eraser which is a little useless. Can someone please help to explain either what its actual purpose is, and how to stop it from doing that?
Generally the first color in the palette (index 0) is used to specify the “transparent color” on indexed images, useful for transparent layers. The only kind of layer that doesn’t use the transparent color is the background layer, so you can draw with the first palette color only in a Background layer.
You can also change the index used for transparency from Sprite > Properties menu, but it looks like you want to draw just inside a background layer so you can convert your layer to a background using the Layer > Background From Layer option and then you will be able to paint with the first palette color.