I'm just curious to know if thats even practical?
Yes it is, when multiple images are merged together like that they are known as "Sprites".
The advantages are less http requests and preloaded states for images that change on hover such as rollover navs. When your image is preloaded you won't get the flicker or delay when hovering on an anchor.
What would you prefer to do, having multiple image files or just 1 big 1?
It really depends on the purpose of the images.
If they are background images used for presentation then yes those would be candidates for a sprite. Although you don't have to go to the extreme of merging every single BG image of the entire site on to one sprite image. In fact, there are some cases where the image must be a single image as with repeating BG images.
You can group them together in a related manner and come up with more than one sprite. That will reduce the complexity of your css while reducing http requests at the same time.
If they are content images that belong in the html then I would not suggest making sprites of those. It would defeat their purpose and add unnecessary elements and css to make them work, not to mention the mess you would have if css was off.
Here is a simple sprite used on a navbar.
It has three states that change according to the current page, hover, and default.