I was having 2.1 and it was lagging, before couple of days I upgraded to 2.2 and it is still lagging. I want now to do Factory Reset as recommended here, but I just have the below concerns:
As far as I understand, factory reset can be done by simply going to:
Settings --> Privecy --> Factory Reset
Is that correct or should I follow some other procedure?
Yes, there are other methods, but this is the best one IMHO.
Does the factory reset on 2.2 will take me back to 2.1 level?
No, I can see how you would think that. Don't Worry these are Flashed ROMs.
It will just Reset to whatever the last Flashed Data was. (In your case 2.2).
Will I lose the localization support. I mean I have SGS from Middle East and it has Arabic Keyboard support, so is this affected by Factory Reset?
No, as long as the Official 2.1 also had Arabic you will be fine.
I am new to Android...
Everyone starts new, please enjoy your Android Experience.