I have been using sugar pine for all of the heads and most of the bodies. On a couple of bodies I used some leftover Western Red Cedar scraps from fence posts and such. Use anything that carves easy, is light and has a uniform grain. Some people use basswood for the heads and cedar for the body.
As for knives I have an old 3" German carbon steel pocket knife that sharpens really easy so I prefer it to stainless steel. I have a really small thin knife for details and a couple of small chisels. For doing the bodies I rough them out with a draw knife (there's always people selling them at the flea market.) and use rasps and a sureform to round the body.
I started with this book http://www.amazon.com/Making-Decoys-The-Century-Old-Way/dp/0870335790
it has nice full color photos.
It is a really relaxing and rewarding activity.