As I said in my first post, there are lots and LOTS of breeds of sheep. Today I'm going to talk about some of the most common breeds a knitter or crocheter might encounter, as well as some rarer ones that you're more likely to encounter only if you're a spinner (or in one case, a weaver).
Merino: Merino is the most common breed of sheep to see on a yarn label. The reason is fairly obvious - merino sheep produce the softest wool of any breed. In my experience it is most common in sock yarn. Merino is also a delight to spin. One warning, though. If you like to wash your own fleeces, be prepared for a greasy, greasy mess. Merino sheep also have the most lanolin of any breed.
Blue Faced Leicester: Also known as BFL (which is good for me, because I can't pronounce Leicester to save me). Not quite as soft as merino, but has a longer staple (the length of the individual fiber) and isn't as greasy. Because it isn't quite so fine and has longer fibers BFL is also more durable than merino. It is often touted as a fairly ideal first fiber for beginning spinners, and is one of my favorites to work with.
Navaho Churro: These are the sheep that the Navaho raised in the Southwest United States. They are rugged little things, highly resistant to pests, drought, and disease. They are a double coated breed - they have long guard hairs mixed in with their wool. Navaho Churro wool is rare in commercial yarn, with the exception of some weaving lines. The gaurd hair is very coarse, so when both layers are spun together it wears like steel. When the fleece is dehaired, it is much softer, but still not next to the skin soft. I have a Navaho Churro fleece that I'm planning on spinning for a sweater for my husband.
Shetland: Shetland sheep come in two styles, double coated and single coated. In my experience, the single coated variety of fleece is more common, but you're probably not going to encounter it unless you spin. This is the wool that was around in the same area as the fairly famous Shetland lace, and (understandably) does very well in lace applications. You have to be careful not to over twist it, however, or it feels like string. Other than that, it is fairly soft - I'd say maybe a little coarser than BFL.
Peruvian highland wool: I'm seeing this one more and more often. It refers to a cross between BFL and merino, so far as I can tell, and is softer than BFL and more durable than merino. I've found it to be something of a mixed bag. Sometimes it's very soft, sometimes it's not so soft. It seems to matter very much how it's spun. If you have your heart set on either very soft or very durable (and not so soft), it's probably best to either touch before you buy or talk to somebody who has experience with a specific yarn. I've yet to see anything in it I don't like, however.