1. If reference based OTU picking is used (ie, -m uclust_ref with pick_otus.py) the reference database sequences all act as seeds for the tested sequences to cluster against. Depending upon whether new clusters are allowed, any sequences that fail to cluster at the given identity will be effectively added as new seeds to the existing set of seeds as OTU picking progresses.
2. We do suggest doing reference based OTU picking for Illumina data, considering both the ability to parallelize the process and the tendency of short reads to fall into fewer clusters with the de novo process, which seems to be incorrect (the seed sequence is different than the seed sequence that would be used if the full 16S sequence was clustered at 97%). If you want to do parallel OTU picking that allows new clusters, you can follow this tutorial here:
http://www.qiime.org/tutorials/open_reference_illumina_processing.html
3. Handling paired end data for OTU picking is tricky. It will probably be easies to cluster just the forward or reverse reads independently and compare the results.
Hope this helps,
Tony Walters