Yes.. contests are a great way to market.. well more like you said... drawing your established users deeper into your site. You might some new ones with how well you advertise your contest. As for legal issues... there is always legal issues when it comes to anything on the internet
I would sit down and write out a "rules of contest" fact sheet for your users to view. If you are really concerned about the legal issues you can get your draft looked over by an attorney in your area, it isn't that expensive.