Compressed Paletted textures aren't supported
When Redream attempts to draw a texture it seems to have multiple checks to see if the texture is valid. However one of the checks is incorrect, this being "paletted && compressed" textures causing an error that terminates Redream when it shouldn't.
According to official Sega Documentation the Dreamcast shouldn't be able to support textures that are compressed and paletted at the same time, however this appears to be a mistake in the documentation since "paletted && compressed" textures are rendered correctly on hardware as seen in the picture below.
I have provided an example cdi with the texture and palette files in question as well as a screenshot proving it runs on hardware. If need be I can provide more information on this.
If you need a reference for "paletted && compressed" textures, tvspelsfreak has made a program that takes a PNG and makes a texture file in the Dreamcast's native format and I have made a program that takes this texture file and converts it back to a PNG.