http://en.wikipedia.org/wiki/Sega_master_system
# Graphics: VDP (Video Display Processor) derived from Texas Instruments TMS9918
* Up to 32 simultaneous colors available (16 for sprites, 16 for background) from a palette of 64 (can also show 64 simultaneous colors using programming tricks)
* Screen resolutions 256×192 and 256×224. PAL/SECAM also supports 256×240
* 8×8 pixel characters, max 488 (due to VRAM space limitation)
* 8×8 or 8×16 pixel sprites, max 64
* Horizontal, diagonal, vertical, and partial screen scrolling
so sayeth wikipedia, anyway.
their article on the game gear claims 32 colors from a pallete of 4096, but that sounds wrong.
No, this is correct. The SMS' palette is 6-bit, meaning 64 colours to choose from. BG tiles can select one of two 16-entry palettes, meaning 32 on-screen (roughly). When they made the Game Gear, Sega upped the colour depth of the palette to 12 bits, meaning 4096 colours to choose from.
If anyone's interested (plug plug), you can see a couple of demos I made for Sega 8-bit, a 3-D SMS one which uses the glasses (and scanline colour changing), and a GG one that shows up to 288 colours on-screen at once.
A lot of Sega's hardware is backwards-compatible. The SMS' VDP contains SG-1000 video modes: the GG contains SMS and SG-1000 video modes; and the Genesis contains SMS (but neither GG nor SG-1000) video modes. The palettes are not really designed to be "subsets" of each other, since the SMS' palette is 6-bit, and the Genesis' 9-bit, and so the relative brightnesses of each channel don't overlap between the SMS/Gen except for black and full brightness. (Do the math to see that this is true.)
As far as the 224/240-line modes go on the SMS, I don't know it in depth, but I'm sure you can find some technical docs that say these modes exist only in the SMS2, PAL SMS, and Game Gear. Codemasters games use these modes.