Have you checked the Flag "24 Bit" in MED? if 32 Bit is selected, then the skin has an Alpha map...

Try the Improved Overlay Material:
http://www.coniserver.net/wiki/index.php/ImprovedOverlay

Maybe this works...

Tutorials:
[Blender]Terrain creation ENG/GER
[Blender]Low Poly Tree Modeling
[GIMP]Create a Texture for Terrains
CLICK HERE