I'm using Greenfish Icon Editor Pro. It is totally free of charge! It is by far the best free icon editor I have ever tried. I specially like the feature to replace a color component with transparency. This is great to remove a background color and preserving smooth edges on the image.
From the description of the product on the download site:
GFIE Pro is a powerful icon, cursor, animation and icon library editor. Layer support with advanced selection handling makes it a really professional and unique freeware tool for designing small pixelgraphic images. GFIE offers high-quality filters like Bevel, Drop Shadow and Glow; supports editing animated cursors and managing icon libraries. It's lightweight (< 1.8 MB unzipped) and also has a portable version - just unpack it to your USB drive and use it anywhere. A clean, customizable, multilanguage user interface makes it really easy to learn and use.