In this concise buyer's guide, Fazal Majid examines the impact of increasing megapixel capacities on consumer digital cameras. He concludes that more megapixels actually degrade image quality in all but ideal lighting conditions:
The problem is, as most consumers are fixated on megapixels, many camera manufacturers are deliberately cramming too many pixels in too little silicon real estate just to have megapixel ratings that look good on paper.
For any given generation of cameras, the conclusion is clear - bigger pixels are better, they yield sharper, smoother images with more latitude for creative manipulation of depth of field.
Nikon and Canon have also introduced 8 megapixel cameras with tiny sensors pushed too far. You will notice that for some reason camera makers seldom show sample images taken in low available light (like these ones taken at ISO 800 with my Canon 10D)...
A reader was asking me about the Canon G2 and the Minolta A1. The G2 is 2 years older than the A1, and has 4 million 9 square micron pixels, as opposed to 5 million 11 square micron sensors, and should thus yield lower image quality, but the G2's 3x zoom lens is fully one stop faster than the A1's 7x zoom (i.e. it lets twice as much light in), and that more than compensates for the smaller pixels and older sensor generation.
If there is a lesson in all this, it's that unscrupulous marketers will always find a way to twist any simple metric of performance in misleading and sometimes even counterproductive ways.
My recommendation? As of this writing, get either:
An inexpensive (under $400, everything is relative) small sensor camera rated at 2 or 3 megapixels (any more will just increase noise levels to yield extra resolution that cannot in any case be exploited by the cheap lenses usually found on such cameras). Preferably, get one with a 2/3" sensor (although it is becoming harder to find 3 megapixel cameras nowadays, most will be leftover stock using an older, noisier sensor manufacturing process).
Or save up for the $1000 or so that entry-level large-sensor DSLRs like the Canon EOS-300D or Nikon D70 will cost. The DSLRs will yield much better pictures including low-light situations at ISO 800.
Film is your only option today for decent low-light performance in a compact camera. Fuji Neopan 1600 in an Olympus Stylus Epic or a Contax T3 will allow you to take shots in available light without a flash, and spare you the "red-eyed deer caught in headlights" look most on-camera flashes yield.