Yoga asana posing isn't the average westerner's exercise. Movements are slow, practitioners rarely break out in a sweat, and breathing deeply is more common than breathing heavily. It's easy to understand that one might be unsure about appropriate clothing for such an unfamiliar activity.
The Big and Small of it Be like the Buddha, and go for the middle path: not too baggy, not too tight. You want to be able to breathe and stretch, with a wide range of motion, but you also should be sure to avoid wearing clothing that could get in the way of your poses. It's important to be able to freely stretch, and freely take deep, regular breaths.
Top Half T-shirts are okay, but wear something that fits. Avoid off-the-shoulder crop tops, since they might fall off-your-torso during poses like Downward Facing Dog. Wear something slightly tight, a shirt that won't fall off you no matter which way your torso dangles, but still lets you move. Tank tops work well, too. Women, wear a good bra. Ladies can tell their nicely-fitting, comfortable bras from the older, more worn-in ones. A sports bra is best - you want everything hugged in close and out of the way for the more difficult yoga poses.
Bottom Half. Sweatpants are ideal, snug at the hips or waist, with slight flare starting at or above the buttocks, to allow for comfort while bending, without the fear of the pants falling or riding down. Shorts are okay, but bare legs might make their owner cold - remember, most forms of yoga don't heat up the body very much. If you're comfortable in leggings, they'll work, but make sure you test them out with a few practice stretches first. You don't want your clothes to hinder your agility.
The Feet Bare. That's it. Bare feet allow for better grip of the floor and yoga mat than do shoes, sandals, slippers or socks. Because yoga asana posing relies so much on balance and the placement of the feet, this is very important. Covering the feet is not an option.
Extras and Accessories What of bracelets, bangles, watches, necklaces, earrings, and other jewelry? Kick it, all of it. Take it off before you practice if it dangles at all, makes noise, might get caught on something, or could interrupt the yoga asana session for you or anyone joining you. Stud earrings are okay, but in general, keep the jewelry minimal. And no toe rings!
They could really mess up your balance. You aren't likely to need to wear a sweat band around your head, since yoga probably won't make you sweat. Avoid wrist and ankle weights like the plague - they'll damage your posture and possibly cause you undue strain. It might be a good idea to tie long hair back, since it could get in the way even more than dangling jewelry.