Google uses the ALT tag to perform a search for images in its image search.
Just go to http://images.google.com and do a search. The text for many of the images comes from the ALT tag.
Yes, This generates good traffic as well and you can rank higher pretty easily for image searches because of using proper and relevant keyword for the image.. I rank on 1st position for search engine logos keyword in image search..
Yes, most search engines, including Google, look at your ALT tags when indexing your Web page. For many sites, particularly image-heavy sites, ALT text is one of the few elements available for the search engines to index. If your page has no text at all on it, it can still get a high search engine placement by using ALT text.