I'm using Photoshop CS3 for mine, but there are plenty of great free applications available. A few examples to get you started:
Graphics Gale is popular for pixel art. http://www.humanbalance.net/gale/us/
GIMP is a popular Photoshop alternative. http://www.gimp.org/
Krita is a popular and praised Photoshop alternative designed for the Linux OS. http://www.koffice.org/krita/
Pixen is a popular artist's and animator's program for the Mac OS. http://opensword.org/Pixen/
So whatever your OS of choice, there's plenty of options! A graphics tablet such as a Wacom also helps with image creation a lot, but I've still seen a lot of great work produced with a mouse and keyboard. Ultimately, it's all about your own artistic competence of course. These programs don't create the art for you. They're just another artist's medium.