Pellet size does matter. I would go for a .22 pellet gun. A .177 shoots faster and flatter, but they are not as powerful. A .22 shoots slower, but it packs quite a punch. If I were hunting squirrels with a pellet gun, I would want a .177 that shoots 800 fps+ or a .22 that shoots 600 fps+. I would take the .22 over the .177 any day. If you were hunting rabbit, I would use a .177 with 1000 fps, or a .22 with 700 fps. I would again take the .22 over the .177.

As for pellet, I would use:

1. Flat nosed pellets
2. Hollow Points
3. Domed pellets
4. Pointed pellets

A flat nosed pellet generally shoots more accurately. They also have a large point of impact. This will cause maximum damage.

Hollow points are great pellets, but they are not as accurate. If you get a great hit they will expand and cause maximum damage.

Domed pellets are not as accurate, but they penetrate well. Since the pellet does not expand on impact, it will cause minimal damage. If you miss the vitals, you will only wound the animal. The animal will escape.

Pointed pellet are the least accurate of the mentioned pellets. Since the pellet does not expand on impact, it will cause minimal damage. If you miss the vitals, you will only wound the animal. The animal will escape.