This sticky thread has lots of links to book sources, both free and to purchase. As for libraries, that depends on the libraries where you live. Where I live they are a bit slow to pick up on the ebook thing, so their selection is small, but my library cards lets me borrow ebooks from them.
The books will need to be in a format the reader supports, but fortunately Sony readers support a lot of them. Personally I stick to ePub, since it's the most common one among publishers who aren't Amazon, and all the PRS-x50 readers can do ePub natively without any extra effort on my part.
Copy-right laws are different in different countries, so what is free in the US may not be free in Australia. If in doubt, you can ask here, we have lots of other Australians posting here, or google to find out before you download.
And welcome to MobileRead!
