My school typically uses the Dolch words because many of them do not follow typical phonics rules, so they can not be sounded out - kids have to learn them by sight. One good thing about using the Dolch list is that there are numerous online sites that provide high-quality activities for teaching/using the words.

The kindergarten and first graders try to learn all of "their" lists as well as number words 0-20 and many color words. We also have a list of "school" words for older children. I would look into the National Reading Panel's recommendations for teaching phonics, too. They have based their findings on research.