i use Illustrator and if needed photoshop.
But I've seen others on here use gimp which I think is free. or you can download a free trial of photoshop.
I've never used gimp so I cant say anything about that program.
After your image is done just add it to a word document then print it out. I did my buddies "mahan brewing" on normal paper cut and glued looked good.
Inkscape is the big one for me. I use gimp for image editing before vectorizing in inkscape, but I have heard you can do much better than gimp for opensource... its near the bottom of my to-do list.
Yeah i do web design too and use gimp and inkscape for that as well. If you are new to graphic design and design software, just realise that it will take some time to get used to. There are also lots a sites out there that have free vectors (high end clipart really) that you can use instead of having to draw everything yourself. liek this one http://dezignus.com/ also when you make an image for a lable, make sure when you save it, it has a dpi of at least 190 so it will look good when you print it and not all pixalated