Really, the “best practice” here in my opinion is to manage the .htaccess file yourself if you are capable of doing so. This gives you a lot more flexibility in the use of the file than the Account Control Panel’s limited basic authentication tool.
That said, as for your specific questions:
No, but it will get overwritten if you do anything to effect it in the account control panel, like add new users, or change passwords, etc. Not the permissions set by default on the panel generated .htaccess file do not encourage casual editing.
See answer to question #1 - the panel .htaccess tool simply write its own .htaccess file. On a side note, it doesn’t know your directory structure at all, which is why it puts the .htpasswd file in the same directory (I prefer to keep those completely outside the web-accessible directories, so I always manage my own).
I don’t use the Panel tool, but prefer to prepare and manage my own .htaccess file(s). If you want a “easier” or “friendlier” way to manage basic authentication for users, there are many scripts out there that give you a nice interface to this, which you could install if you want.
–DreamHost Tech Support