Yes this is called favicon.ico
Photoshop will probably create icon files if you first save the file as a png, then export as ico. There are many programs made specifically for creating icons, though. (Perfect Icon)
To get the icon to show up in the address bar, you must include the following line in between the HEAD and /HEAD tags in the source code of your webpages.
link rel="icon" href="favicon.ico" type="image/x-icon"
link rel="shortcut icon" href="favicon.ico" type="image/x-icon"
You don't have to have both of these lines, but it's better to. One is for IE, the other for Mozilla.