Most web pages contain images. GIF, JPEG and PNG are the three major image file formats used in web pages. Other formats are not widely supported by all browsers on all systems, and so they are not suitable for use on the web. ICO files (files ending in .ico) are a special case, used in the browser's "favorites" (bookmarks) list.

.jpeg files are by far the best choice for photographs on web sites. DON'T use GIF or PNG for photographs on the web.
.png files are the best choice for line art, clip art, drawings, logos and other non-photo-realistic images.
.gif is often slightly better than PNG for very small icons and other tiny images. GIF is the safest choice when transparency is required. On the web, GIF is acceptable for the same purposes as PNG.
.ico files are used to store icons displayed in the "favorites" or "bookmarks" list of a web browser, if the user chooses to bookmark your web site. For more information, see how do I get my own favorites icon?
.bmp is NOT appropriate for the web, ever.
All serious graphics programs can produce GIF, JPEG and PNG images. Linux users will want to use GIMP. Windows users should consider the inexpensive Paint Shop Pro. Macintosh users and high-end graphics mavens swear by Photoshop.