So my question remains - if I upgrade will there be any loss of functionality? I'm not concerned with external peripherals, just the MBP itself.
When you upgrade to Lion or Mountain Lion, the one "loss" of functionality will be the inability to run Universal or PPC-based applications. Apart from this, I believe there have been additional functionality in the newer versions of OS X, not less.
WHY do Apple discontinue support for version of their OSX so soon? My machine is hardly old. Particularly as there seem to be no guarantees that a later version of the OS will be compatible with the hardware.
10.6 Snow Leopard was released in 2009, 10.7 Lion in 2011 and 10.8 Mountain Lion in 2012. You can still purchase Snow Leopard from Apple and update it to to 10.6.8 and a LOT of 3rd party applications still say 10.6+ onward for support. So you're all set there. Apple will, however, not work on creating updates for Snow Leopard or Lion for that matter since they are essentially archived versions of OS X, all development resources are focused on making Mountain Lion better and safer and to address whatever issues arise.
Snow Leopard has a unique place in the line-up since it's the last version that worked with Universal/PPC applications, and there are a lot of people who rely on that..
Look at the excellent chart provided in
this post by member "chas_m" to see that Snow Leopard's usage followed very closely to Mountain Lion..
Now your machine does support Mountain Lion and there is no reason for you not to upgrade to it..
My late 2009 iMac is compatible with Mountain Lion as well, but I hard expect that to be the case for the next couple of versions of OS X. At that point in time (assuming release cycles of 1-2 years), my iMac will be sufficiently old to remain where it is and require me to purchase a new Mac to use the newer versions of OS X..