Listen to whatever you like! (I mean, maybe not stuff with parental advisory lyrics...) I used to put on Louis Armstrong, Ella Fitzgerald, Gershwin's An American in Paris, Madonna, the Beastie Boys, Led Zeppelin, U2... I have a pretty eclectic collection of music and listen to it all with my kids. I don't think music should be watered down for kids. I would also dance with them (holding them when they were babies, and then once they could stand I'd hold their hands and help them dance). They are both music aficionados now, and they both have great rhythm when they dance!
As an aside, Pottery Barn Kids often has fantastic CDs for kids - "real" music by "real" artists, wonderfully sophisticated yet accessible for young ears. These CDs have taken us from babyhood into elementary school.