Use the Save For Web dialog, it's easier for this. PNG-24 is of course the best option, as it saves alpha transparency which makes for nice shadows and stuff. Problem is, not every browser supports PNG as it should (IE6 still doesn't, IE7 will according to the reports).
Your best bet is still GIF for simple transparency. When you select that from the drop-down on the right, you'll see the 256-color palette. Click any color you want to be transparent, and then click the Transparency (left-most) button below the palette. That's it