Q1: It depends on the dynamic range (i.e. the level of contrast between hightlights and shadows). If the dynamic range is not high - one can get away with one shot. Otherwise two, three or even five expsoures may be needed to prevent total white or black out - i.e. to prevent pixels that have values of 0 (complete black) or 255 (complete white) that cannot be further processed. The shots shown here are taken with three exposures 0, +2 and -2 evs. This example shown below that I have experimented last year was taken with one shot - the dynamic range is not diverse and I can get away with it - with the bonus that the sky is musch more interesting than the original version.
Q2. Raw is preferred as raw format captures more data than JPG. Although JPG can still be used the results can be limited. Raw format has a depth of 24 or 48 bit, a tiff format 16 bit and JPG 8 bit - you loose data and hence definitions with JPGs.
Q3 - Photoshop CS3/CS2 has this feature built in and is quite easy to use. There are one or two others that I have tried as well.
Cheers