What's the best way for me to take pictures of smaller items i want to sell on Ebay?

I'm only using a small digital compact, what is the best settings for this task? What type of background is best? What is the best lighting, natural sunlight or a Halogen lamp? Ii sometimes use my iphone as I can just transfer the pics directly on to the Iphone ebay app, though the picture even though of passable quality is a touch too small.

Try zooming in with your iPhone.

I would set your camera to "Macro" or "Text" setting. Depending on the color of the objects, I would suggest a black or white background. I believe natural sunlight would be the best lighting as this would show the customer the true colors of the object.

To take good product photos, you don't need a special camera, you just need to pay attention to your details. Some of the bridge cameras with macro and super macro mode actually do a very good job. I know this from first hand experience working as a product photographer - all I had was a Canon bridge camera, and it did a fantastic job on even very tiny objects. The trick is in the correct set up and in learning how to do take such photos.

Here is how to do it the cheap way:
- Build yourself a light tent, it can be as basic as a card board box http://www.digital-photography-school.com/how-to-make-a-inexpensive-light-tent
- Use desk lamps with bright full spectrum (a.k.a.daylight) bulbs
- Use white background paper and change it often to keep it spotless
- put your camera on a tripod
- set up custom white balance (read your manual on how to do that) for perfect colour
- if your product is really tiny, be sure to use the (super) macro setting on your camera. If you have a DSLR, you may want to use extension tubes together with the macro lens.
- overexpose the photos slightly to keep the whites white, instead of grey (because due to all the bright light, your camera will want to under-expose the shot). Either go fully manual, or use exposure compensation (read the manual if you don't know how to do this).
- In Photoshop (or other editing program), put on the finishing touches - but you shouldn't need too much since you are starting out with a very good photo.