Adobe Photoshop is expensive; GIMP is free (
GIMP - The GNU Image Manipulation Program), but they use the same interface, and it takes a little learning. The user manual for GIMP can also be downloaded for free, but it's a big file, so I haven't downloaded it yet! One thing I was careful of was never to save over anything after changing it; I always gave it a new file name in case I liked the old version better! I also keep an editable version of my sig (*.xcf for GIMP) since *.jpg files are nice and small, but very difficult to edit!
For backgrounds, I use pieces of screenshots, edited in GIMP. At the very least, you'll need to crop and resize images to get the right shape.
Your character + pets + other game graphics come from the model viewer. The one Circuit recommends (
WoW Model Viewer) depends on OpenGL, so doesn't work well on Windows Vista. It needs to be installed on a computer with World of Warcraft, so it can use the graphical models stored in the game. You'll rebuild your character as you did when you first generated him or her, choosing the race, face, etc., then pick out each piece of equipment. You can pose him or her (includes using emotes) and take snapshots using different colors of background (use one that is generally the same color as the background you'll use in your sig.). You export those snapshots as *.jpg files, then trim away the background, crop/resize your character, and place them and any other images you want on the background you chose for your sig.
Text: look for free fonts! I've been using
Download Free Fonts - 1001 Free Fonts but there are a lot of nice ones out there. Text in GIMP (or any graphics program) is frustrating. It's got to be in a new layer (goes there first by default), and if you want to outline it, use paths. I was surprised at how much I had to learn there!