Part of Mark Verber's
Before getting into the details about what camera might be best, I would like to note that a better camera won't necessarily get you more compelling images. Many of the most compelling images in the history of photography have been taken with what would now be considered primitive or even junky cameras. While I don't completely agree with everything in Ken Rockwell's Your Camera Doesn't Matter, I would agree that people often have overly optimistic expectations that a "better" camera will give them better images. High impact images comes from the photographer's vision/eye, willingness to be patience, knowledge, technique, and luck. The first step in getting better images is committing to learn and practice. That said, an appropriate camera does make is significantly easier to capture those high impact images and can enhance the quality of the images as well. It you have even a semi-decent camera already, the best investment you could make would be to purchase a tripod or taking an appropriate class. Most of the cameras I suggest are digital rather than film. I have written up some thoughts about why why digital cameras rule.
See makethephoto's how to choose a digital camera for a nice graphic decision tree.
The most significant factor to settle is the ease of carry. Small cameras will almost always under perform compared to larger and heavier camera. Yet, any camera is better than no camera. If a camera is too big or heavy for you to bother with, then it's unlikely to get used and you are guaranteed to miss capturing images you want. I recommend people who purchase a single camera to settle something that they would be willing to carry into all the situations they would like images from. I can't tell you how many people I have seen purchase a largish camera "for better quality images" who them never take pictures because the camera is too much of a hassle. Serious photographers typically have multiple cameras because some events are all about best quality image capture while other events are more focused on the experience, but there might be some images that will be captured along the way. Since around 1995 I have almost have three sizes of camera. A full size SLR, a compact camera that could fit in a large coat pocket, and a camera which could fit into my pants pocket. The website camerasize.com is quite helpful when it comes to comparing the size of different cameras.
Sub-compact cameras easily fit into a small clutch purse or into a pants pocket. Pretty much every manufacturers makes at least one sub-compact camera. Don't expect anything better than basic snapshots from these cameras unless you are taking picture outside on a bright sunny day. If you take pictures indoors, expect that you will have to use a flash which will often wash out your subject. The Canon PowerShot SD (Digital IXUS) line tends to offer the best image quality in the ultra-compact though Sony makes a number of great cameras in this class as well. Most cameras in this class don't provide reasonable creative control over exposure, it's point and pray. Slightly larger than most sub compacts, but smaller than most compact cameras is the Sony RX100 and the Canon S90, S95 & now the S100. These cameras is superior to any of the other sub compact cameras currently on the market.
Cameras that doesn't required something "extra" to be carried. This is a camera that fits into a purse, a book-bag, a briefcase, etc. For many men, this means a camera which is small enough to be stuffed into a coat pocket. This is the most popular size camera. I will note however, that some people over estimate how big a camera they are willing to carry in real life. I have watch several people (mostly men) purchase compact cameras never to use them more than once or twice because they were "too much trouble" to carry around. Many eventually switched to sub compact cameras. Every serious photographer I know has at least one compact size camera because there are days that you just don't want to carry a larger camera. Much like sub-compact cameras, you shouldn't expect good image quality in anything but daylight.
There is way to much attention focus on the number of mega-pixels (MP) cameras have... more isn't necessarily any better. 3MP is enough for basic snapshots or sharing things on the web, 8MP is good enough for a good size print. Beyond 8MP there is no advantage to more pixels unless you are doing 10x14" or bigger prints. Nearly all compact cameras have very small sensors which have mediocre performance. If two sensors are the same size (which they are today in most compact cameras), and both have an adequate number of MP, the camera with the small number of MP will likely capture better quality imagines because it will be less susceptible to noise and likely be more sensitive to light.
Low Cost: There are lots of decent choices. I tend to like the low end of Canon's PowerShot line such as the A570. They tend to be pretty decent cameras, do color accurately, and can use replacement AA batteries which is useful when you can't use a charger. It's worth noting that most manufacturers "budget" cameras use exactly the same sensors as the "prosumer" cameras. The main difference are bells and whistles than most people don't use.
Rugged Environment: Pretty much all the companies that make Point-and-Shoots makes rugged cameras that can take a drop and function under water. Most of these cameras which being very durable have only moderate image quality. You basic pint and shoot designed for dry land will produce more pleasing pictures. On the other hand, if the camera can be used or doesn't survive the environment it's not much use. If I was going to purchase a waterproof camera today it would most likely be The Olympus TG-1. There was recently a pretty good comparision of leading waterproof cameras. The other option is to purchase a waterproof case for one of the higher quality cameras below, though just the case is often more expensive that many of the waterproof point and shoots.
"Serious" Photographers: The camera manufacturers pitch "prosumer" cameras. There image quality is typically not as good as a DSLR, the controls controls are typically more difficult to use so it's too tempting to leave the camera in one of the "creative" models. What would I recommend for serious photographers? If you don't have a DSLR, get one, carry and use it. The cheaper DSLR are cost competitive with many of the prosumer cameras and will get much higher quality images. Consider one of the "serious compact cameras" if you already have a DSLR or rangefinder and want a small, carry anywhere camera as a supplement.
For me a perfect camera would do the following. No camera does all these things right yet:
Sony DSC-RX100 is my favorite camera in this class and the camera I purchased. The UI is decent, good image quality. Usable up to ISO 1600, to 3200 if you are going to push it.
Panasonic LX7 has the widest maximum aperture. While it has less detail than the Sony, it controls noise better than the Sony at higher ISO levels. I find I like the controls of the LX7 better than the Sony, but it isn't as compact.
Canon S100 is the smallest option and seems to have a very fast start-up. THis camera will easily fit into my pants pocket. A downside of the size is that the S100 feels a bit awkward in my hand... the shutter release doesn't feel quite right and I would prefer the thumb wheel to be higher and it's easy to bump when using the buttons. Several times I have accidently changed a setting. I don't like the menu system for the S100 as much as I like the LX7.
Canon G12 which I have little experience with (played with a friends for an hour or so). It seems to be slightly more versatile than the LX7 and S100 and feels better in my hand, but it is also larger and heavier. It's no going into any clothing pockets. Some people might consider the new interchangable lens Panasonic GF1 in this category, but I think it's a bit too large to be consider "compact".
Olympus XZ1... Looks decent on paper. In the same league as the Canon S95 and Panasonic LX5.
Ricoh GXR takes a different approach to interchangeable lens but putting the lens and sensor in in a sealed unit. Looks quite interesting.
Panasonic GF1 is considered by some people to be in this category. While I like the GF1, I think it's too big to be considered a truly compact camera. The GF1 is more the size of a compact rangefinder. In fact, from a size and density perspective, it reminds me of my old Leica CL The GF1 have a 1-2 stop advantage over all the zoom compact cameras on the market and significantly better resolution provide you are using a decent lens like the 20/1.7. I will write more about the u4/3 line of camera below.
Some people can't imagine restricting themselves to a single framing. There are many situations where I found the view from a fixed lens between 28-50mm lens (35mm framing) worked well. Generally 35-40mm was the best length for me.
Fuji X100 is a game changing camera. It's reasonably compact, has a good lens (35mm equiv field of view F2.0), a good sensor, and a hybrid optical/electronic viewfinder which is great. This is the camera I mostly uses these days.
Ricoh GR Digital IV has nice ergonomics and the sensor is finally in the league of other small sensor compact cameras (LX7 and G12). A decent sensor is combined with an excellent lens. Auto focus is very quick and the camera is pocketable. If you are looking for a smaller shooter at a wide angle, this is likely the camera for you.
Leica X2, It's great that a pocket camera would have a good lens being mated to a APC size sensor... but $2k price tag?! I doubt I will ever convince myself to spend so much money. I have no personal experience with the X2. The review suggest that while there are a lot of nice aspects to this camera, that it's far from perfect. The biggest downside to me seems to be that the X2 doesn't focus as quickly as the Ricoh GRD-IV or the Panasonic GF1 and the manual focus isn't the best.
Sigma DP1 & DP2 has a good quality sensor and a sharp lens, but is slow to operate and a surprisingly so/so high ISO performance given it's larger sensor. This camera has less mega-pixels than several of the other cameras in this category. It has enough pixels that it will work well until doing larger prints. The DP1/DP2 would make excellent cameras for backpacking.
For other ideas you might look at Mike Johnston's "recommended" point and shoots and his decisive moment digital camera. Mike decided that the Pansonic GF1 is his decisive moment digital camera. The blog serious compacts does a good job tracking this space.
Compact Super Zooms, sometimes call all-in-ones, sometimes called SLR-like, are a popular style of camera. They typically have an electronic viewfinder with a huge zoom range with the lens. These cameras typically cost less than a DSLR kit, weight around 1lb and are approx 2/3 the size and weight of a compact DSLR that has a small lens, and significantly smaller and lighter than a DSLR with lens which covers a similar range. I think the the Canon 10SX IS (versatile, great movie mode), Panasonic FZ28 (reasonable fast auto focus in shorter lengths and good color control) are the two nicest cameras in this category.
I don't like compact super zooms. Why? First, they all have small sensors which means that you can't shoot them at anything faster than ASA 100 without a lot of noise. If you use them zoomed out, you really need to be in bright light or you will see suffer from camera shake. Even at ASA 100 I have found the image quality to not match any decent DSLR. While they are lighter and more compact than a DSLR, they are big enough that you have to consciously think about taking one with you, and you need to hang it around your neck or put it in a good size bag. In other words, it's not much less hassle than a DSLR.
If you are carrying a rangefinder or a SLR, you made a conscious decision that you want to take pictures. The "small" camera bag typically weight at least 2lbs and has at least camera body and two lens. Serious outing could easily be 20lbs of gear in a large backpack. Most people don't have this devotion. Some people are willing to bring to carry a few pounds of camera gear whenever they are focused on capturing images such as when they go on a trip or to some special event. Why? Because this class of camera captures much high quality images, and greatly increases the odds that you will capture image you hope to get. Why?
Sensor Quality: The sensor in digital SLRs and rangefinders are typically has more than four times the area of the smaller cameras. This means that they can operate in significantly less light. They also are less prone to noise so night time images work much better.
Fast Action: All of the consumer grade digital cameras have what is often described as long shutter lag times (which is really auto-focus, exposure setting lag). With some of the digital point & shoot cameras, from the time you press the button, to the time the camera records the image is more than one second. When taking action shots, this is an eternity. I have lost many images with a camera that has a mere .5 sec shutter lap. The higher quality consumer grade cameras do permit you to set focus and exposure manually. Once these are set, shutter lag can be acceptable, but you have lost the P&S ease of use. Using any of the current consumer grade digital cameras in manual mode is significantly more difficult than using a fully manual Leica. See a nice table listing many digital P&S shutter lag times. I don't know if these number of fully accurate, but they are a useful general guidelines. For some content, shutter lag times of the Canon XTi DSLR are .105 sec, classic film SLR is about .06 sec, and a Leica M rangefinder with a mechanical shutter is .018 sec.
Narrow Depth of Field: If you regularly rely on a narrow depth of field to through the background out of focus, you will have trouble with any of the consumer P&S since they have small sensors (e.g. given the same field of view and aperture setting, the depth of field will be significantly greater than 35mm).
DSLR: Any of the DSLRs from major manufacturers are decent. If you already has lens in some system, select a DSLR which can use those lens. If you don't have lens, or your lens can be used by any of the digital bodies, then I typically recommend Canon or Nikon Digital SLRs. I really like the compact bodies made by Olympus, but the lens selection is still pretty limited.
4/3 and u4/3: This system used by Olympus and Panasonic can be thought of as a DSLR with the mirror removed. Viewing will be electronic through the back LCD or an electronic viewfinder. These camera have interchangeable lens. Lens with native mounting are quite limited (my favor being the 20/1.7 for the u4/3). With an appropriate adaptor, any 35mm lens could be used with manual focus. I think the Panasonic GF1 is the best body today. Size and ergonomics are good. Auto focus sleep is good. Image quality is as good as any of the other bodies in this class.
Fuji X-Pro1: On paper, one of the most exciting cameras coming to the market. Reasonably compact, likely to have ome excellent lens, inovative sensor with excellent low light performance based on the first images I have seen. Only downside is very pricy.
Sony NEX: The new NEX-7 has an amazingly good sensor in a very small body. Unfortunately, Sony doesn't have a good collection of compact lens to go with this very excellent body. Howfully this will change soon.
Rangefinder: Not as versatile as a DSLR, but some people really like using them. They are particularly well suited to candid portraits, street photography when you preset focus, travel, and available light photography. A rangefinder system will typically be smaller and lighter than an equivalent DSLR system. Unfortunately, rangefinders tend to be significantly more expensive than equivalent DSLR.
Red One is am amazing, reconfiguration camera system appropriate for high quality video or stills.
absolute image quality is king. If a fork-lift is required, so be it. Typically the camera is one of the smaller /lighter tems. Tripods, lighting, etc are often involved. View cameras, medium format, etc.
Realize there are a number of factors which need to be traded off against each other. The camera which is right for one of these reviewer might be different than what is right for you. I will not that some people I think there are five major factors which will dictate what camera you should buy.