First you'll need to reduce the image size to 32x32 pixels and drop the colour depth to 256 colours. Decent graphics programs like Paint Shop Pro will do this using various algorithms to make sure that the image does not degrade too badly (Windows Paint won't). Save it as a bitmap (.bmp) and then rename it manually to the .ico extension. It isn't a true .ico file, but most of the time this works.
Best and cheapest is to download and install Irfanview from
http://www.irfanview.com (a very very good completely FREE all-image viewer which is useful for lots else) - 1MB for the program and 3MB plugins.
Using Irfanview you can resize/recolour your image as above and save it as a true .ico icon file (which surprisingly few programs can do).
If you REALLY like fooling with icons you could buy MicroAngelo (look for it with Google), which will let you do almost anything to do with icons (including libraries). But its quite expensive.