I'm strictly photoshop, and it turns out pretty nice. Here's an example of how I build my labels.
Here's an example of one of my labels;
The first thing I do is take some clip art. Now, this picture was from a Russian propoganda poster. I had to heavily modify it in photoshop, but at the end of it I had something I could use for the basis of a label.
Now, most of my labels have a similar look and feel. You can see them at
http://picasaweb.google.com/bobroland/BeerLabels#. To achieve this, I overlay an oval on the original image. Here's the oval I use;
Then it's a matter of adding the text. Easy as pie.
I print them out on regular paper, grab a basting brush and a bowl of milk and paint the back of the labels. It sticks just fine, and is easy to remove after.