If you're connecting to a DAC, the only way to reduce the volume from the Squeezebox Controller (SC) is to rescale the digital word values seen by the DAC. You lose 1 bit of resolution for approximately every 6dB of volume reduction. You might not notice a difference for only a few bits, but I haven't tested this theory.
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Just a followup: it might be possible to convert streams to 24-bit in SqueezeCenter. Then you have 48dB of volume to play with before losing resolution becomes an issue.
I'm not going to worry about it, since I never use the controller volume for serious listening.