"My local test environment runs VMware Server 2.0 on a modest 8G Dell Optiplex workstation (about $500). I have ~20 nodes, running a variety of operating systems and software environments (mainly for testing our software), and don't have any issues.
VMware has the benefit of being widely adopted, with a variety of free and commercial products, which means that creating a machine image you can use on other systems is simple, and portable."
There are some good recommendations in the other answers here regarding specific products but you will also want to make sure that you are doing your best in terms of VM configuration to prevent any potential malware detecting the fact that it is running within a Virtual Machine as quite a lot of the more advanced attack code will behave differently if it detects that it is being sandboxed. Alain Zidouemba at the Sourcefire VRT team posted an excellent blog entry about this last year with specific reference to VMware VM's but much of the advice applies to using other VM environments.
