My favorite fabric for photo booths has two requirements, that is is wrinkle free and looks nice.
Panne velour is a nice light weight fabric that costs around $4 to $5 a yard. sites like
http://www.denverfabrics.com/Cart/catalog_items.aspx?Query=velour
sell it as well as other fabric web sites like this one:
You may wish to also try local craft stores like Walmart or Joanne Fabrics.
It is best to keep the inside of the booth fabric a neutral color like gray or some other middle tone. Having a white or black fabric on the inside will make the photos turn out poorly when using an automatic exposure camera. 