You definitely want a Word-compatible word processor, because RTF/DOC is the default format for electronic submissions. Beyond that, it's purely a matter of personal choice.
I use Scrivener because it's a fantastic manuscript-organising tool - it uses TextEdit, OS X's built-in editor, for word processing, and exports to RTF or DOC, which I then check in Pages (OpenOffice screws with the line-spacing, for some reason...). All Scrivener really does is save your individual documents in a tree hierarchy and allow you to add meta data like synopses, PoV labels, and research notes - but it does so beautifully!
On Windows, there's a very similar application called Liquid Story Binder - haven't tried it myself, not having used Windows in years, but I hear it's very good.