Note: This information comes from Yoast.com, however the last time I tried to pull it up it was unavailable so I’m mirroring the relevant bits here. I also re-wrote the generator to use more friendly htaccess rewrites instead of redirects. This is important if you are running multiple WordPress sites on the same server and need your htaccess changes to be site-specific.
There are two steps in changing your WordPress permalink structure. The first is simple, go to Settings -> Permalinks and select Post name:
If you don’t have the post name option yet, you’re not on WordPress 3.3, the release of which is imminent. You could wait a bit for the update, or you could just add /%postname%/ as a custom permalink structure.
The second step is to redirect your old permalinks to your new ones. To do that, you have to add redirects to your .htaccess file, I have created a little tool that generates these redirects for you based on your domain and your old permalink structure. To use this tool, click the button: