I am no means an expert when it comes to pixels, but I wanted to give them a go and have a play.
I will try to explain exactly how I shaded the image but we all have our own method
so my instructions are only a guidance. You may prefer to stay on the one layer, I prefer layers.
I magnify the image to about 500%, put in some detail, zoom back to normal size to see how it looks,
maybe undo and try again and carry on like that. 

Dodge Tool Settings Shape - round Hardness - 0 Step - 25 Density - 100 Thickness - 100 Rotation - 0 Opacity - 35

Burn Tool Settings Shape - round Hardness - 0 Step - 25 Density - 100 Thickness - 100 Rotation - 0 Opacity - 35

1. Image, increase colour depth to 16 million colours. Layers - Promote background to layer and rename base. With the magic wand , tolerance 0, feather 0, add, select the white areas of the image and delete so you only have the outlines. Ctrl+D.  At this point you can carry on with the tut or you can go round the image with the paint brush, size 1, to give the character your own colours. For the tutorial I will give the colours I used, if you have changed yours you will need to use a lighter shade of those you have chosen.
2. With the magic wand, replace, click the face. Create a new layer and flood fill with #B4A39A. Ctrl+D. With the burn tool, size 5, shade the outline of the head. Give the ears some shade and the eyes. With the dodge tool, size 1, give the ears some highlights.
3. Go back to the base layer. With the magic wand click inside the neck. Create a new layer. Flood fill with the same colour. Crtl+D. With the burn tool, shade the neck.
4.  Go back to the base layer. With the magic wand click inside the hand. Create a new layer. Flood fill with the same colour. Crtl+D. With the burn tool, size 4, shade the hand.
5. Go back to the base layer. With the magic wand click inside the dress. Create a new layer. Flood fill with #9C3859. Crtl+D. With the dodge tool, size 7, highlight the dress.
With the burn tool, size 6, shade the edges of the dress. Increase the size to 10 and shade the pleats of the dress.
Change the size of the burn brush to 3, go over the cntre of the pleats once. Give the bust some shape. Change to size 2 and give the sleeve some detail. With the dodge tool, size 2, hightlight the creases on the sleeve.
Now, I wasn't too sure abut the shading of the dress. So I changed the foreground colour to #C56182, got my paint brush at size 1 and made the dress into a polka dot.
6. Go back to the base layer. With the magic wand click inside one of the shoes. Create a new layer. Flood fill with #474747. Crtl+D. With the dodge tool, size 4, highlight the shoe. Repeat for the other shoe. There you have your country mouse, merge all layers visible and save as a tube or in psp format.