Should the texture limitation work?
I have tried to drag just .gfx files to this but they dont seem to change.
Could it be possible to change it so that it works for already dxt5 gfx files?

it should work, I will test it

the converter says: Limit Material Image Size to
so it means only material textures wil be processed (you should drag .mtrl file)

:( Cannot change every gfx file then.
We get alot of problems in game if we try with materials.