If you're assigning the texture through 'UV/Image Editor', you simply press the little 'A' next to the 'TexFace' button and press 'ZTransp' in 'Rendering Pipeline'.
If you're going to be using the Textures panel, you can select 'UseAlpha' in the textures panel, however this will only affect that texture layer, not the model itself. If you want the model itself to be transparent you need to create a grayscale image where the darker parts are transparent and lighter parts are opaque and uncheck 'Col' in the 'MapTo' panel and check 'Alpha'.