Yes, you can knit socks using circular needles, but not in the traditional sense. You can use one long circular (40" is ideal, in my opinion) for the method called magic loop, OR you can use 2 circular needles at once to knit small diameters such a socks. Videos for both methods are found near the top of this page
As for yarn, you can use any yarn really, as long as you have an appropriate pattern for the weight of yarn you are using and as long as you can get the right gauge for the pattern. A GREAT book for sock knitting is Sensational Knitted Socks
. It covers all of the basics as well as oodles of patterns ranging from easy to advanced.
Good luck!! xxx