When a cue sheet that points to a so called "disc image file" (i.e. to a single audio file that contains all audio data that is referenced in the cue sheet) is imported, MC creates virtual "cue tracks" by interpreting the cue sheet's index data. Each virtual track has a playback range that is stored in the Playback Range library field. When a cue track is played MC reads the playback range data and plays only the specified passage from the referenced audio file.
MC can convert cue tracks like any other audio tracks. If the target format supports gapless playback the resulting separate track files will play gaplessly. MC can encode and decode gaplessly all lossless formats and many lossy formats, including MP3, Ogg Vorbis and Musepack. Encoding & decoding AAC/M4A files gaplessly is possible when MC is configured to use an external encoder:
http://yabb.jriver.com/interact/index.php?topic=59513.msg437855#msg437855.
However, I wouldn't advice re-encoding the tracks from a lossy MP3 image file to lossy track files unless absolutely necessary. "Lossy to lossy" will always further reduce the audio quality. Of course, if the used quality setting is high enough, the additional quality loss may be practically inaudible.
Some programs can split MP3 files losslessly, but technically splitting is only possible at the MP3 frame boundaries, and the resulting files will not usually play exactly gaplessly. AFAIK, the only lossless MP3 splitter that can create track MP3 files that also play gaplessly in MC is pcutmp3:
http://www.hydrogenaudio.org/forums/index.php?showtopic=35654Alternatively you can convert the cue tracks to a lossless format. The files will be a lot bigger (about as big as directly encoded lossless files would be), but you will preserve the decoded MP3 audio without any further quality loss and the files will be natively gapless. If you have only a few MP3 cue albums to convert the increased file size might not be an issue.