Gradients: A smother transition between two or more colours. It's like when one colour gradually changes colour to become another. Gradients are usefull for shading and highlighting, but you can use them in other ways. (Gradients are a layer effect, and also an object in CS2, im not sure about elements though, but i think its the same)
Blending: This is the way in which two colour interact. The default blending is when you simply 'see through' the top colour into subsequent colours. However it should be noted that it will retain its brightness. Other useful options such as 'darken', 'burn', 'hue' or 'colour' have different effects and uses. They are very useful if you know how to use them. (blending options are found on the layer pallet in CS2, so maybe the same for you)