The old overlay effect (where black was treated as transparent) didnīt look very nice on leaves and round shapes. I donīt even know, if it works on models.
This is maybe a better way:
Make the trunk with the branches as a model with a regular skin.
For the leaves: make a separate mesh (a plane will do) and use a separate TGA or DDS texture with a mask in the alpha channel, where the actual leaves are white (opaque), and the surrrounding area is black. For the transition use a small gradient (3 pixels or something like this).
Apply this .tga pic to the plane and copy and place the plane, wherever you want leaves on your tree.
I would now use two separate models (trunk only and the mesh with the leaves). The leaves model can now get the Improved Overlay material, that can be found in the Wiki. With this material you can avoid Z-Sorting errors and the blurred transitions at the borders of the leaves are replaced by hard (but rounded) edges.
I always used this method with double sided faces (for the leaves), but I donīt know if this is necessary.