What graphics package should I use?
Depends which platform and budget you're looking for. Photoshop is certainly one of the top packages out there, but only available for Windows and Mac, and pretty expensive. A good alternative is the GIMP, which runs on both windows and unix platforms and is open source. Good web packages are Fireworks and, at a lower price, Paint Shop Pro. PSP is a way to learn, intuitive, and has good web tools, but is Windows only.
Also consider auto generation - if you have a LOT of buttons and such, it might be useful to run scripts that autogenerate the images.
There are web specific applications out there, like an animated gif maker (such as Ulead Gif Animator), a thumbnail image generator (such as Thotor Thumbnail Generator), image optimisers, and batch type conversion programs (such as Batch It!).