I do this a lot. And you are right it does give large sensor results from smaller sensor cameras. I use Photomerge in Photoshop mostly, and the latest version in Photoshop CS5 is (almost) flawless. Great advantage with this is its quick and you can use the raw files for optimum quality. I also use PTGui occasionally.
Two things I make sure of, firstly make sure all images have the same exposure and focus point, and secondly have a large overlap. I use 50%. This means more images but less stitching errors.
I have to do lots of trimming afterwards and use the distort and warp tools in Photoshop to straighten the images up. In terms of lenses I find 35mm to 75mm focal lengths give the best most natural results. Wide angles cause lots of distortion problems, and can sometimes be impossible to get right. Also the closer you get to something the more difficult it can be to get looking it "right", if thats what you want of course.