The game's texture archives (.ytd files) can be opened using OpenIV. The textures can be imported and exported using a variety of formats. More information can be found in our guide Replacing Textures.
To create textures, any program that supports transparency can be used, it is recommended to choose one that supports multiple layers. Most commonly used are GIMP (free and open source), Paint.NET (free) and Photoshop (proprietary).
Textures are usually saved as .dds files. To view, edit and save .dds files, additional tools (such as DDS Converter) or add-ons (such as nvidia's DDS Plugin for Photoshop) need to be used. Alternatively, .png files can also commonly be found.