Photoshop by default do not allow saving files with .ico extension.
With “ICO (Windows Icon) Format” plug in, you will be able to save images with .ico extension.
You can download the plugin from
After downloading, unzip it, copy the file ICOFormat.8bi to folder
C:Program FilesAdobeAdobe Photoshop CS2Plug-InsFile Formats
Now close photoshop if its already open. Start photoshop, now you will see .ico format in save as menu.
To create favicon, you need to create an image of size 16 * 16 pixel. Then save it in .ico format.