Yep, uses the balance in the Paypal account first - then draws from either a bank account or card you have registered (think it usually says where it's taking it from in the top right hand part of the 'confirm payment' page

You can withdraw the funds from your Paypal account by going to the account overview and it's the 3rd option in the silver bar, under the account tab
i think there is a small fee for withdrawing less than £50