First question: yes, iCloud backs up your photo as it is. If you delete media from your photos library it will be deleted from iCloud. (I might add that videos are also stored in the cloud - and consequently take up the most room).
Second question: It is possible you can use the Scanner and Camera wizard to import photos from your iPhone. Here is are two articles that briefly describe the process.
Before you delete all (or most of) your photos off your iPhone, I would recommend that you double check that everything has been transfered correctly so you don't lose any pictures.
You probably already know this but it's worth mentioning anyways. When you go to delete photos from your iPhone, open the Photos app, click the Camera Roll album, then select the box with the arrow icon at the top right of the screen. Select pictures to be deleted, then tap the Delete button in the bottom bar (this is also a way to email more then one picture).
Of course, the other option would be to turn off the iCloud backup of your photos. (You already know how to get there but go to iCloud > Storage & Backup > Manage Storage > [your name] iPhone > Turn Camera Off.)
Your answer lies deep in the settings app on your iPhone.
Go to iCloud - Storage & Backup - Manage Storage - your device
Backup settings allow you to save space in iCloud by excluding app data in the next back up. You can toggle on more and more buckets of data until the estimate is low enough to allow the next backup attempt to succeed.
When you turn off data under iOS 7 where it says Backup Options: Choose the data you want to back up. - this does delete the backup copy of that data, so consider paying for more space (or cleaning up elsewhere) if you cannot afford to lose that backup copy.
Assuming you have data you are willing to risk losing or is backed up to iTunes on a computer, then you can clean enough space and add things back slowly (triggering another backup after each addition) once a small minimal backup has been completed successfully.
Furthermore, if you go to the above screen and turn off Camera Roll backup, it will prompt you to delete these files from the iCloud server backup, freeing the space immediately (just because you delete the videos on the device, they take up backup space on iCloud until you purge the backup by category or delete it entirely and start over).
Your iCloud space has to remain full of files that were backed up and now deleted on the device for it to function. After a few days of backups, the old backups expire and no longer take space but in your case you might want to purge them intentionally rather than wait for it to happen programatically.
Best Answer
I'm afraid there isn't an easy way to do so. As far as I know, there is no app which can do what you want... So I've come up with two alternative solutions.
The most easy one is to connect your iPhone to your Mac, launch Image Capture (which comes by default on your Mac), select all the photos and delete them. Here is a tutorial how to do so.
You can do this on your iPhone as well, without a Mac, but you'll have to do it manually. Which isn't a grateful job if you've got over a 1,000 photos...
Open the camera app, hit the upper-right icon (share), tap all the photos you want to delete (they are marked with a red check-icon) and then hit delete.