I am of the Old Skool that beleives that Vinyl is the only real way to DJ. However, if I were to do it by laptop I would probably get some MP3 mixing software, there are quite a few out there and it does come with a personal preference and what works for you. Many Demos for that type of software can be found at
www.downloads.com Some of them even do al the beat matching for you (shudder). There is also one or 2 that even come with hardware interfaces. I think that MP3's would work fine if they were encoded from a raw format...ie: vinyl, CD, live, etc. as long as you a high bit compression you should be fine and not sacrifice too much sound quality, probabbly 256k compression would be fine.
I still stand by that vinyl is the best and like it was said earlier, 2 techs and a good vestex mixer.