To create a favicon.ico simply create a 16x16 .PNG file and convert it to an icon resource with png2ico. If you want, you can add more images to the same icon resource to provide alternative resolutions. Most browsers only use a 16x16 image but in a different context (e.g. when you drag a URL from the address bar onto your desktop) a larger icon may be shown. If the icon resource only contains a 16x16 image, this will be scaled to the appropriate size, so technically there is never a need to add alternative resolutions. However, doing so can increase the quality of the displayed ico
Keep in mind that for a user with a slow modem a favicon.ico may increase the page loading time by a few seconds if it is too large, so don't overdo it. Adding a 32x32 alternative should be enough to make sure the image will look good even in contexts with larger icons. Adding even more and larger alternatives is unnecessary bloat. Try to keep the number of colors below 16 and create a 16-color icon using the --colors 16 switch of png2ico (or even create a b/w icon with the --colors 2 switch). This will result in a smaller file that loads faster.
When you create the images to include in your favicon.ico, don't forget that the icon may be composed against various background colors so you should use transparency rather than a solid background if you want to avoid that your icon appears inside a box. Note, that icon resources only support binary transparency, i.e. a pixel may be visible or invisible but not something like 30% translucent.
Installing your Favicon
To add your new favicon.ico to a web page put it on the server into the same directory as the web page it is for (e.g. www.example.com/foo/favicon.ico for www.example.com/foo/index.html). That is the first place a browser will search. If it doesn't find an icon there, it checks the top-level directory of the server (www.example.com/favicon.ico for the www.example.com server), so by putting it there you can have a default favicon for all the pages in your domain. Depending on browser and configuration, the favicon.ico is not always rendered, even if it is in one of the above locations, unless the web page explicitly declares its presence. To declare that your web page has an icon, you add the following 2 lines into the <head> section of your page:<link rel="icon" href="favicon.ico" type="image/x-icon">
<link rel="shortcut icon" href="favicon.ico" type="image/x-icon">