Easy and fun: Download Telegraphics’ small, efficient favicon Photoshop plugin. (Direct Mac CS3 download.) A $5 donation is suggested.
Then unpack it and drop it in Applications -> Adobe Photoshop CS3 -> Plug-Ins -> File Formats.
To use, create any square image, then Save or Save As… ICO (Windows Icon) format as favicon.ico. Place that at your site’s root.
The plugin does everything for you: colors, resizing etc. But your results will vary on how good your source image scales down to 16px by 16px. I recommend starting with a 64px or 128px sqare image.

February 23rd, 2008 at 6:14 am
Not working with CS3
March 12th, 2008 at 10:19 am
[…] Primeiro você deve criar o seu ícone (o favicon.ico, que nada mais é do que uma imagem no formato de ícone no tamanho de 16×16 pixels.). Você pode criá-lo usando um site (como o Favicon.co.uk) ou por aplicativos gráficos (como o Photoshop, veja um tutorial e baixe o plugin). […]
June 8th, 2008 at 1:32 pm
Link not working, any mirrors?
June 10th, 2008 at 11:23 am
Both links worked for me just now (page browsing and download).
October 17th, 2008 at 6:30 am
Doesn’t seem to work on CS3 (win).. any ideas?
October 17th, 2008 at 7:06 am
I worked it out, it was a problem with Vista.
You need to log in as Administrator, then install the plugin, then edit the properties and give it full access rights.