I'm a little confused on the phono setting question.
If you don't already have a TT hooked up to it how are you getting sound from it?
To answer the phono pre-amp question on a very basic level, the signal sent to the amp by the stylus is a very weak signal compared with those sent from the tuner, cd, etc... and needs to be pre-amplified before going to the main amp. If your amp has a phono setting, than it contains a pre-amp of some sort.
If you are hooking up another device into the pre-amp, that may explain the loud distorted noise. I am only guessing here as I have never done that.
Now the real question is are you motivated to start finding an upgrade for your speakers? The upgrade game can be very nice for the ears, but hard on the bank account.