shooting at lower resolution - how does the camera behave?

Ok, we all know that higher resolution on a digital sensor has better resolving power, but can have a trade off with light gathering capacity for each pixel, possibly resulting in higher levels of noise.

What I want to know was - what does the sensor do when you take a lower res image? Something significant, such as a 2.5MP image from a 10MP sensor. Does it take all the data from the high res RAW data and downscale the resulting image? Like maybe averaging information across 4 pixels (thus averaging out noise). Or does it actually render a high res image and downscale that?

Or is the same thing?

If the camera creates the smaller image from the RAW data, then that's going to be less work and will give higher quality than any other process. Canon's engineers aren't stupid. That's what they will have done.

I though RAW was RAW was RAW - data straight off the sensor??

If you want lower resolution, does the camera not start throwing data away - how can that give better quality?

It averages the data from adjacent pixels, so there'll be a "noise reduction" component, and more available data for colour averaging.