First of all, there is no 'right' format for a manuscript. Everyone says something a little different. No one wants it exactly the same as anyone else. Let me say that right up front.
Let me also say that I'm not the expert here. I'm trying to figure things out just like all the rest of the starving authors. But I have learned a few things along the way, and I figured I'd share them with you. For what they're worth.
So while there are no absolutes in what agents and publishers want from an author in the form of a manuscript, there are some basics, some standards, and some general rules of thumb that you'd probably do well to follow.
Author and former literary agent Nathan Bransford wrote a really nice blog entry on the topic, as did Moira Allen in her article on Writing World. Chuck Rothman, writing for SFWA wrote an excellent article on the subject. Daily Writing Tips has even more advice - sixteen manuscript formatting tips, to be exact. And if you read down into the comments of that article, you'll find people divided all over the place on the 'right' way to do things. And this just scratches the surface of the subject. A little more research will provide you with additional voices, each with their own advice on how they think it should be done, or what the 'right' way of formatting is.
The agent or publisher wants to be able to read your manuscript easily, make notes where necessary, and not have to work around excess garbage to do it. It's their job to read manuscripts. If they read everything in 10-point Lucida Calligraphy, they'd be blind by the end of the week. Even reading something only slightly difficult to read puts a tremendous strain on a person. Which is why they have guidelines for the type of formatting they'd like to see.
Font is the first major bone of contention. Some folks say Times New Roman. Some say Courier New. Others are less picky, and include fonts like Arial, which is a sans-serif font. Advice I've seen says that most editors don't like those fonts. Generally, the two most preferred fonts are Courier and Times New Roman. Now you may have some folks who mandate one or the other - and I've seen examples of each - but they're both simple and easy to read. And you're probably not going to receive a rejection based solely on font choice. Change the font to whatever the agent's stated preference is and send it to them. If they don't say, I pick either one of those two and roll with it.
As far as layout goes, almost everyone agrees on some standards here. Generally they want to see your manuscript double spaced, printed on one side of the paper only, left justified, with one inch margins. Again, you're going for 'easy to read' here, not 'looks like a published book'. It's your job to provide content, the actual words written down on the page. It's the publisher's job to provide style, what they actually look like when it's finished. You may be adamant in your ideas of how you want it to look, but frankly, they really don't care about that. It's supposed to look like a manuscript in the manuscript stage - they want something they can work with. Remember, you're paid for your ideas and how eloquently you put them into words. They're paid for how the book looks when it's sitting on the shelf in Borders.
Avoid the cutesy fancy stuff. Just open up the word document, set the spacing and margins and font and begin typing. That's all you need to do as an author as far as formatting goes. You may think it looks cool to try and give the story a more interesting font, or that it helps with the theme of the story to provide it with an appropriate title font. You may think it helps with your creativity and ability to get the words down on paper. Whatever. If it works for you when writing, knock yourself out. But when you format it to send to the professionals, it needs to be professional too. And that means you axe the Comic Sans for Courier, and take out the extra spaces and neat characters that signify the end of chapters.
Oh, and while we're on the subject of neat characters, almost every piece of advice I've heard says to simplify here too. Lose the 'smart quotes' feature, the 'em' dash, and any other auto-formatting feature, especially when e-mailing your submission. Characters like that tend to lose something in the translation of documents, and you really want them to see what you wrote, not some squiggly messed up character that converted wrong from ASCII. This is especially true when sending work via e-mail.
The only formatting an editor generally wants to see is for words you want italicized. The catch is, they almost never want you to italicize them. They'd rather you underline them instead. In the publishing world, underlined text is almost always understood as italicized.
It all boils down to presenting an easy-to-read document that conforms to general industry standards. It's a simple matter of making their work easier for them, and thus making it more likely they'll want to work with you and publish your novel. Find out the particular way a particular agent or publisher wants it and give it to them that way. If they're not specific enough in their submission guidelines, follow as close to a standard format as you can and you should be fine. The more professional your work is, regardless of how close it looks to a 'real book', the better your chances are to turn it into a real book.