As far as I know “Kindle format” is same as mobipocket book format. FBReader supports some *.mobi files, but does not support DRM-protected version. This means FBReader can open free Kindle books only.
No. It is not clear if third-party readers for .LIT files are legal or not. We do not want to discuss this question with Microsoft lawyers.
On the other hand, Microsoft has dicontinued their Reader product, so there will be no new books in .LIT format. This means that even if there is no problem with lawyers, we do not like to spend our time supporting an obsolete format.
You can run ConvertLit program to convert your .LIT files to standard ePubs (supported by FBReader).