Compression problems

While trying to make T-wolves' uniforms, I've experienced some problems when trying to save the png to dds. Squares of color appear around the originally smooth edges. It goes from looking like this:


to having distorted edges like this (mainly around the wordmark and the collar):



I've never faced this problem before, so if anyone has a solution it would be greatly appreciated.

why not just paste it over to an existing dds file, merge, then save

Kevin, I've tried it but it still gives the same result. Still, I appreciate the help.