Firstly, I use english-derived names for towns. Smith's Falls, etc.
Secondly, for a cooler feel, I may take a foreign language (or dead language) and use words / names from it to represent towns in a particular region (old english, etc.)
Third, sometimes I'll just make stuff up.
For major places and people, they have names defined. For the "next small town" or "barkeep #121" I have lists of names I cross off (and note which person/place to which it was given) or solicit input from the players.
The soliciting input from the players has a few problems, though. As in all groups of friends, there are things that stick and are hard to shake. For instance, all enchanters or random people who own potion shops are invariably named 'Tim' by the party if they can get away with it. For mercenary fighters we get alot of 'Sven Thorssen' and 'Thor Svenssen' combos, as well as 'Groo'. All merchants the players want to call "Uncle Al". So be it. Its the price of pop culture I guess.