Depends on the look you go for. I like that cartoon look so I sketch my graphics and ink them on Inkscape (free, awesome vector gfx, user friendly). I then size them and export each cell as a png image. That's mspaint comes in. I use mspaint to create my final sprite sheets (only coz it's familiar). If you're going for that retro-styl pixel look though, just use paint from the get-go. If you need alpha, you can always open your final sheet in photoshop/gimp and remove the bg although dbpro supports colourkeys so it's not really necessary in the case of retro-gfx.
EDIT: Wow, I made a few spelling mistakes on my mobile
Also, if you want different degrees of opacity (alpha levels between 0% and 100%) you can always just cut that component of the image (an aura, say) out and paste it to a seperate layer/canvas, edit the alpha channel and paste it back to where it was. (Hope I explained that clearly). Also, just recieved this in the ADG news letter so I haven't tried it and can't vouch for its usefulness but anyhow, there's
Tile Studio
