Depending on how 'sophisticated' you want the music to be, there are more & more decent online Flash/JS sequencers that you could record.

http://beaterator.rockstargames.com/beaterator.html

http://www.lilyapp.org/about/

http://www.ampledesign.co.uk/va/

There's also this collaboration site: http://www.kongregate.com/collabs

For more ideas, have a look through CDM: http://createdigitalmusic.com/

I know you're asking for free ... but look into istockphotop's audio collection if you're willing to spend a little money. It's a very affordable option with a huge range of loopable tracks, and artists that are responsive to specialized requests. Just make sure the licensing options meet your needs for distribution.

http://www.istockphoto.com/audio.php

Depending on how much time/effort you want to invest... AFAIK Pure Data [1] was used for generative (background) music scores in SPORE. Maybe this is a good place to start: http://obiwannabe.co.uk/html/sound-design/sound-design-all.h...

[1] http://puredata.info

Your best bet is probably to try the Creative Commons-licensed music at jamendo.org or ccmixter.org.

Archive.org also has a nice collection of (often free or CC-licensed) "Netlabel" music, much of it electronic.

http://www.archive.org/details/netlabels

I've been involved in developing NAEV [0]. Some of its music is "stolen" from other games under CC license, and some was produced by players.

You can start by borrowing music from other games and put an announcement (on forums, mailing lists, in game) saying that you need music. If people like your game somebody with musical skills will help you creating soundtracks eventually. Just don't expect this to happen overnight. NAEV has been under development for over 6 years.

[0] http://github.com/bobbens/naev

Have you heard about Space Rangers ? http://en.wikipedia.org/wiki/Space_Rangers_%28video_game%29

There's also http://www.musopen.com/

Magnatune (http://magnatune.com) CC-licenses all of their music. It's free for non-commercial use. They also do royalty-free licenses for commercial use, as for example Braid which used some of their music.

not sure if software is free, but check out http://arstechnica.com/science/news/2009/09/virtual-composer...

it also mentions a book that presumably discusses the algorithms. book: http://mitpress.mit.edu/catalog/item/?ttype=2&tid=10661

Go hang out on demoscene music forums and IRC channels. I'm sure there are plenty of musicians that would be happy to pitch in some music for some recognition.