Panorama -- how to stitch

First you need your camera set correctly. The little point-n-shooters with a panorama setting work really well.

Set your camera like you would shoot a landscape then check the settings. Now put your camera on manual and use those settings. This will prevent the camera from slightly changing the exposure as you turn.

I normally hold the camera vertical (portrait), give you more top to bottom.

line up the horizon with some mark inside your camera and try really hard to keep it there.

overlap your shots by about a third, too much is way better than not enough.

Using the merge program of choice, merge them.
Photoshop CS3 does better but CS2 and version seven does well if memory serves.

you'll want each photo on a separate layer

If you end up with lines between the layers, decide which layer is wrong and adjust its levels and curves until it matches. You can also mask using a really soft brush and remove the part of the upper layer that is causing the line

This is old, but one of my favorites. Not sure why nobody has bought one...

The big version is here

This was taken with a Nikon Coolpix S4 balanced on the hand rail (sold several copies)

The big version is here

Another tip...  try to stay away from the wider lenses.  I've found it's a lot easier to stitch when you don't have to worry about distortion from wide angles of view.  Most panoramic software I've tried can account for the distortion, but it's usually only close.