Photoshop does me, youll need to read up on some tutorials to get the hang of it. Sadly its not free, but you could always browse the net for someone to "lend" you a copy, if you catch my drift
Photoshop CS 2 is the latest, great piece of software.
Ive also heard good things about GIMP, aparently it has all the abilities of PS but is completely free. Never actualy tried it, but might be worth a look.
Paintshop Pro is also a good one, been a good few years since ive tried it but its up there with PS. Again, not free though.
Those 3 should keep you covered, there are plenty more out there though. In fact if you look around this forum there is a few links to sites that create labels for you, some free, some not.
I find that a combination of using the label generators and playing around in the gfx program of your choice gives the best results, but thats just my opinion.