In general, switching to a slightly less wide tire should not cause any problems, unless the tires are much too narrow for the rims. Sheldon Brown's Tire Sizing page (under Width Considerations), suggests that if the tires are much too narrow, this can cause pinch flats and rim damage. If you're just going down a few sizes, you should be fine.
Switching to 26" wheels is impractical. The brakes wouldn't line up with the rims, and I don't know how you could fix this. Maybe someone else will have a suggestion, but my hunch is that if it's even possible at all, switching to smaller wheels could easily cost more than the bike is worth, especially for a bike in this price range (about $150?). Do you have any particular reason that you would want smaller diameter wheels?
Finally, 29" tires are the same diameter as 700c (also mentioned on the Tire Sizing page). However, make sure not to use tires that are really narrow relative to the rims.