Hi, Jen -
The best flour sack towels to embroider on are sold by American Chair Store. Their 30x30 deluxe flour sack towel is really nice for embroidering on: http://www.americanchairstore.com/30x30 ... towel.html
They come in packages of 10, for $21, so if you're only wanting one, you're out of luck as far as that goes (unless you contact them - maybe they'll sell singles, but I don't think they do). On the bright side, they make great kitchen towels, so you can always embroider some and do the dishes with the rest!
For thread, you can't go wrong with DMC floss (6 stranded), which is sold at local needlework shops, or chain stores like JoAnn Fabrics, Michael's, and Hobby Lobby. The thread is colorfast and works great for towels.
The biggest thing, though, is getting a good flour sack towel to work on. I've never found a flour sack towel yet in a hobby store or stitching store that was good quality for embroidery - most of them are just too gauzy or loose. The ACS ones listed above are tightly woven, with a smooth surface, and very nice for stitching on.
Hope that helps!