The Nice PayPal Downloads extension for Joomla 1.7 should be compatible with Joomla 2.5. If there have been feature changes to the most recent release, that you would like to include on your site, then you should upgrade. Otherwise, you should be able to upgrade your site to Jooomla 2.5 and keep using the Nice PayPal Downloads for Joomla 1.7.
Please remember to back up your site, including your database, before upgrading. Also, you may need to reinstall Nice PayPal Downloads after upgrading Joomla. If your version of the extension came with an -upgrade version for Joomla 1.7 (i.e. Joomla_1.6-1.7_pkg_nicepaypaldownloads_v1.90-upgrade.zip), then use that one to do the reinistall, if needed.
~ All the best