The problem isn't the dds file, it would be the mesh file.
To date, I learned fragments of information to creating a mesh file for Lunia, but It's still far from reality.
Unless you borrow a mesh file from another character, you can't have a hammer for sieg.
DDS files are created in Photoshop, and must have 256x256 dimensions.
It's one of the "Save as" options.