Hi all, I strongly recommend GIMP, not only free but can do everything you need. It's under constant development. To get an idea of what GIMP can do, go to open movie project website, or try this on google search, "Sintel durian movie project", go to the site and download their short film called SINTEL completely done with open source applications (Blender, GIMP and other few softwares). Then you decide yourself what to use. Its simply an open source revolution .
Just take a look at peoples work using gimp compared to people using photshop, that should tell you everything you need to know, of course a paid software is usually better.
For most tasks, The GIMP is fine for what you need. The only time I would use Photoshop is if I required it for a job (i.e. my client requires that I use Photoshop). If you don't like the GIMP's layout, you can get GIMPShop which uses a similar layout to Photoshop. Check out Paint.NET too for another alternative.
For me GIMP does the job nicely, I use it mainly for web designing. At the beginning it seemed a bit difficult, but later got used to it very well. There are also GIMP forums out there which are very helpful when you are about to master this piece of software, one such is GIMPForums.com.
I find GIMP to be complicated if you have a mac you can use Pixelamator, I use this program almost exclusively. I thinks its faster and better than photoshop in a lot of areas and is pretty cheap. If not then you can't go wrong with GIMP because of the open source plugins that can do just about anything photoshop can do.
I'm no pro,but I find Gimp very powerful and not particularly hard to learn. It has it's quirks, for example I can't figure out how to have text of different sizes/types/colors in the same text box...