This question comes up routinely in the Etsy forums and other crafting sites, so I thought it timely to add my thoughts on the matter here.
My comments supplement my writings elsewhere on crafted items photography - see my tutorial at http://www.boo.myzen.co.uk/artisan.html - I recommend it as supplementary reading to explain some of the terms used below.
Knowledge and understanding may negate the need for an upgrade:
For most posters, who are crafters, not photographers, it doesn't really matter so much what model of camera you have, as knowing how to use it properly. Knowledge and understanding is a far more important tool to have in your arsenal than specific models. Learning appropriate tricks and how to get the best from your camera may serve you better, so only upgrade your camera when you know this is the limiting factor. See my tutorial referenced above for some small item photography pointers - and there are other tips here in my blog. It might also help to spend some time with the camera manual and acquaint yourself with various camera features like exposure compensation and white balance - the use of which will solve most of the problems I witness.
OK, so which model?
You will be best suited to choose a camera that has the specific features for the type of shots you intend taking. For some people that will be the option to get close to small items like jewellery, for others, good exposure for outdoor shots, or good colour rendition might be more pertinent.
It might help initially to write a list of the features you think you need - I don't necessarily mean camera buttons you might press, but aspects of your work where it is vital that the camera performs well. Maybe list what your current camera is falling short on, or where you already think your photos have room for improvement. This will help you hone in on what to look for.
More megapixels are not necessarily better:
There is a current trend with camera manufacture, especially at the low and mid ranges of the market, to have become fixated on megapixels - the public started this numerical obsession and the manufacturers have pandered to it. I'm not alone in thinking that this is a retrograde step in camera development. I'd prefer quality over quantity any day. So please don't be seduced by large numbers alone.
Don't be too worried about the amount of megapixels a camera has - a bigger number is not necessarily better (in this context), and in many cases, is absolutely not a measure or indicator of superior quality. I often get asked, when toting my large black DSLR - "how many megapixels is that?" as though that were all that mattered and when I answer, you can see their chest swell in pride as they declare that the silver matchbox in their pocket has more. They depart, smugly thinking that theirs is clearly a superior piece of technology.
For posting item photographs on-line to sell, the features a camera affords you in terms of allowing you to actually secure the shots you have in your mind as you start, is far, far more important than how big the pictures are. And knowing how to get the best from what you have.
What is a megapixel?
'Megapixels' (MP) is the term of measurement applied to the physical dimensions in pixels of the resulting digital photographs. A megapixel is simply 1 million pixels of screen area - something like 1280 x 780 pixels - a typical modern computer monitor is about this sort of area and therefore about a megapixel. So as you can see, having 10 or more megapixels is certainly more than you need for web based photographs. Large resolution images of big MP numbers are only really necessary if you plan to make enlargements of your images in print form and for fine art and professional uses.
So it may be that an older model, probably to be had at a much better price (my current jewellery camera was bought as a clearance item at half price, when it was superseded by new goodies), may offer you more than adequate quality for these purposes. Any camera in the range of 4-6 MP will give you good quality photographs for screen viewing - allowing some capacity for cropping and choosing the best bit of the photo, then still reducing it in size for screen display. The working features, performance and appropriate results are far more pertinent factors in making your selection.
Which model will be best for you will depend on your particular personal needs. Any recent model from Canon, Fuji, Nikon, Panasonic, Olympus etc. will do the job more than adequately - the limitation in getting good results, is almost always the photographer's lack of understanding, not the camera. Learning some good practices and technique will serve far better than buying a new camera for many people. And maybe putting some of your budget into a table top tripod or bean bag will help you get the best from your camera.
Look at exactly why your photos aren't satisfactory before thrashing the plastic. If lighting is an issue, which it is for most of us - look at my DIY lighting diffuser tutorial for some ideas of how you can improvise for free at home with items you probably have to hand.
If you have smaller items, choose one with a good macro feature - Canons have good macro which is why so many crafters use this marque - macro focusing it allows the camera to focus when much closer to the subject and therefore fill the frame with your item so that you can see lots of detail. Fujis also have features like super macro which is good for very small items like jewellery - allowing you to get as close as an inch away from the object.
Another feature that may be very worthwhile is a countdown timer. Many cameras have the option for a 2 second or 10 second timer and with close and macro work, this may prove to be a very valuable tool. Especially where light is low and you therefore can only achieve a slow shutter speed, which may mean that you record movement while handling the camera.
Being able to place the camera on a tripod or other improvised stand (a folded towel on some books is good, I use a home made bean bag filled with polybeads) will be a great help with eliminating movement. But even then, just pressing the shutter button, if you're heavy handed or your support has some spring, is enough to jiggle the camera as it takes the shot.
But using the cameras timer allows it to settle from your hand movement before taking the shot - the 2 second timer will probably be enough in most cases. Sometimes you may be casting a shadow or impeding the light by standing over your scene - or causing reflections or a colour cast (bright clothing can often influence the appearance of reflective items) by being close at hand, so using a timer allows you to set it going and withdraw until the shot is taken.
I have a range of cameras and work as a semi-pro photographer - but for my product shots, I use an inexpensive digicam (Fuji now, a Canon until recently) - the perspective and handling of them when taking close shots in a confined space is ideal - much better than my unwieldy DSLR.
The small sensors of current digicams mean that they offer a good depth of field for a given lens aperture compared to larger format cameras. What does this mean? Depth of field (DOF) is the amount of your subject, from front to back, that is within acceptable sharpness. Whilst a shallow DOF can be used creatively for interest, you often want as much of your creation in focus as possible - and this feature of smaller cameras is useful for helping to achieve that. In short, for the same scene and lighting, it is easier to get more of it in focus than with a bigger camera. There is also the added benefit that if you move between focusing and taking the shot, you have a greater room for error and less likely to have out of focus failures.
Pick one up and handle it:
I would also strongly urge that you ensure that you handle a camera in the flesh before purchasing - no, I don't mean go shopping nekkid. It gets old very fast if you can't easily reach a button you use regularly, or keep catching one each time you use another feature. My recommendation for buying is to make a shortlist of suitable models on paper first, based on your wish list discussed earlier and price and availability etc. Then find them, where possible, in stock on the high street and handle them. Ensure that you can reach function buttons easily, can see the display etc. etc. If you're going to be spending a lot of time in its company, ensure that you're going to get along.
See this site - Digital Photography Review (DPR) for reviews and feature lists of all current and recent models: http://www.dpreview.com/reviews/specs.asp
This is a very big subject and I've only tickled it a little, so I'll no doubt add more on this subject over time. I urge you to also visit my tutorial on small item photography for more explanation of features like macro mode and depth of field and how they apply when taking small item photographs.
Also see my tutorial article on making my own lighting diffuser, for free, from found objects.