The TeX filter should indeed recognize \color{blue} or \color{red} or \color{green}(my green is actually color #00ff00 which html more accurately calls lime), but no other colors. And \color{} applies to the _entire_ expression regardless of where you put it.
You may have an old version of the TeX filter before \color{} support (such as it is) was added. If the above command doesn't work for you as advertised, try downloading http://www.forkosh.com/mimetex.zip and compiling the current version from its source (see http://www.forkosh.com/mimetex.html for instructions).
Let's see if Martin has a sufficiently current version installed:
$$$\color{blue}\frac1{\sqrt{x^2+y^2}}$$$ renders $$\color{blue}\frac1{\sqrt{x^2+y^2}}$$
From my site, the same expression renders
Yeah, Orestes, it looks like you might want to download yourself a more recent version.