I use 1&1 domains (.co.uk cost £2 per year!) and they have email for £0.69 a month. The DNS is slightly awkward to use and their TTLs are quite high, but then you only need to set it up once, so that's hardly an issue. You also get spam and virus checking included.
If you point to you own DNS server, 1&1 will still let you have their DNS server as a secondary. (don't forget your zone transfer security settings)
However, that said, for email and DNS, you might as well check out US providers too - latency performance is not a problem for these things.
I would seriously reccomend against 1&1.co.uk for domain management, I have had 2 domains with them for a while now and they are pretty poor. I have the forwarding only package which is presumably what you would want.
You can only do frame forwarding, you are limited to 5 pop3 mailboxes, editting DNS is a complete pain.
No, 1&1s email and domains work fine. You just buy a domain package and then edit the DNS records (admittedly you only get to edit 2 - A and MX records, no CNAMES etc) to point to your server's DNS. That's what I do, A record on the primary NS points to my DNS server with all my settings, I then keep the 1&1 secondary NS.
To edit the DNS for a domain: go into the control panel, check the box next to the domain you want to edit, then from the DNS menu, Edit DNS Settings.
If you just click the domain, you'll only get the forwarding option.
I'm not sure what you mean - unless you set up a lot of subdomains, and expect them all to resolve to subdomains in another server... in which case, I think the answer is no. It is providing domain-registrar functionality after all, not full-blown hosting (where you surely can forward your subdomains)
All I do is set the A record to my own DNS server, and set up the subdomain CNAMEs there (well, my control panel does it for me).