The first replicating molecules were most likely RNA. RNA is a nucleic acid similar to DNA. In laboratory studies it has been shown that some RNA sequences have catalytic capabilities. Most importantly, certain RNA sequences act as polymerases -- enzymes that form strands of RNA from its monomers. This process of self replication is the crucial step in the formation of life. This is called the RNA world hypothesis.
The common ancestor of all life probably used RNA as its genetic material. This ancestor gave rise to three major lineages of life. These are: the prokaryotes ("ordinary" bacteria), archaebacteria (thermophilic, methanogenic and halophilic bacteria) and eukaryotes. Eukaryotes include protists (single celled organisms like amoebas and diatoms and a few multicellular forms such as kelp), fungi (including mushrooms and yeast), plants and animals. Eukaryotes and archaebacteria are the two most closely related of the three. The process of translation (making protein from the instructions on a messenger RNA template) is similar in these lineages, but the organization of the genome and transcription (making messenger RNA from a DNA template) is very different in prokaryotes than in eukaryotes and archaebacteria. Scientists interpret this to mean that the common ancestor was RNA based; it gave rise to two lineages that independently formed a DNA genome and hence independently evolved mechanisms to transcribe DNA into RNA.
The first cells must have been anaerobic because there was no oxygen in the atmosphere. In addition, they were probably thermophilic ("heat-loving") and fermentative. Rocks as old as 3.5 billion years old have yielded prokaryotic fossils. Specifically, some rocks from Australia called the Warrawoona series give evidence of bacterial communities organized into structures called stromatolites. Fossils like these have subsequently been found all over the world. These mats of bacteria still form today in a few locales (for example, Shark Bay Australia). Bacteria are the only life forms found in the rocks for a long, long time --eukaryotes (protists) appear about 1.5 billion years ago and fungi-like things appear about 900 million years ago (0.9 billion years ago).
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