http://www.humanbalance.net/gale/us/

I orginally found it through RPG Palace.
It has two versions, a free one, and a shareware.
There really isn't much difference between the two though, unless you really want to make cursors, icons, or animated .gifs.
I also preffer using this over Photoshop and MS Paint.
Why?
IT HAS AN ACTIVELY UPDATED PREVIEW WINDOW.
So while you're zoomed in on your sprite, you can see what it's going to look like at normal size (or a few other zoomed in or out sizes) while you're doing it. Which is really nice when you're making one from scratch.

There's also some other really nice features, like a customizable grid. So when you're working on a character set, you can make a rectangular grid that fits the size of each frame, rather than just a square.

It looks a little confusing at first, but it's really easy to use.