Is it possible to connect iTunes playlists to folders so that playlists update automatically when I add new song to a folder?
Yes, but you don't do it within iTunes. If you want the song files you drop into a particular folder to automatically be added to an iTunes playlist, you use Automator to create a folder action like this one:
You start Automator, and create a Folder Action. You select the folder you want as the source of files. Then, the action is "Import Files into iTunes" at which point you select the playlist to which you want the songs added. Then you save the Folder Action.