2003 yz impeller seal is leaking, do i need to replaice head gaskets thanks ian

This is telling you your oil and water seal need replacing ASAP do not ride until fixed as you will seize bottom end guaranteed !
there is small seal each side of your water pump impeller when you take the impeller out replace both even if only one needs doing as you will be going back to replace the one left soon after as they always go together..
Most people would not do this repair without replacing the impeller as well - usually the impeller starts to wear groves where it spins inside the seals then damages the seals So you get the theory behind replacing the whole lot as old impeller can damage your new seals
The seep hole is designed to give you warning of burst seal before its way to late as without the seep hole leak you would have no idea you are leaking coolant into the motor
You can do your self its a bit of work but not complicated - if you do your self don't forget to change your engine oil couple of times after first few rides reduce any risk of having coolant inside it where it should not be
good luck regards Jamie

The hole is a weep hole, designed to drain coolant from water pump seal leakage or oil from bearing seal leakage from contaminating either system. So one of the seals is leaking, and you should rebuild the pump.
Looking at the parts diagram it appears the impeller is threaded onto the shaft on the YZ250....hope that helps, heres the parts diagram
http://www.mrcycles.com/fiche_section_detail.asp?section=50188&category=Motorcycles&make=YAMAHA&year=2004&fveh=1236

replace water pump seal and shaft

Water coming out of the hole is to indicate that the pump seals need to be replaced. Some water is probably in the gearbox now. If the oil is whiteish you do. Pull the right case cover then remove the pump cover and the impeller then replace the seals. Remove the liquid gasket so that the hole is open again. You can see a parts diagram at www.babbittsonline.com Click on the red "OEM PARTS" tab. Items 6 and 7 are the seals separating the water from the oil. Put a wrench on the impeller shaft next to the gear, then unscrew the impeller as if it were a screw. It would be good to replace the gasket (item 10) as well. Please take a moment and rate my answer to your problem.

milky oil is water mixed into the oil. Replacing the seals should fix the leak. Nothing special on the top end gasket.

The two seals in the diagram below are separated by the casing they fit into. The impeller is threaded to screw onto the impeller shaft. I think you already knew that by your "holding the tire" note. The center casing does not get split. The right casing does remove then a wrench is used on the shaft as the impeller unscrews counter clockwise. It is risky to "Lock the wheel" because the gear on the impeller is very thin and can break.

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The impeller screws onto the impeller shaft. Go to the site below and you can see a parts diagram. You will select the brand, year, model, etc... It has the part numbers and prices.
http://www.babbittsonline.com/pages/parts/viewbybrand/1/Yamaha.aspx

There are actually two seals. Are you sure the leak is a bad seal and not the water pump gasket or a cracked/broken housing cover?

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if i had to guess at this one the seal behind the impeller on the water pump is bad

change the seal behind the water pump impeller
the shifter shaft seal will stop leaking
if it continues to mix water and oil you will have to change the head gasket