As I understand it, ringtones have to be in a certain format. If it is in the correct format .m4r then you can download the ringtone to your desktop and install it via iTunes. I use a program called iPhoneringtonemaker to make ringtones and convert older mp3 ringtnes. There is also a free program that will do that too, iRinger. Or you can convert your files to AAC format (.m4a) and rename them to m4r and use iTunes to install it for you again. Plenty of ways to do it, but I don't think you can do it straight from the phone.
I suggest audiko, free and easy. You can download them or even make your own from songs. Just go to the website: www.audiko.net you don't have to download anything, and they have all ingrones for iPhones!