Member::create_new_password() will generate a password.

So, you could do something like this, which takes the form data and puts it into a new member instance. This is the submit handler for the doForm action for where you setup your form, which would look something like:

class RegistrationForm extends Form {

	function __construct($controller, $name) {

		$fields = new FieldSet(
			new TextField('FirstName', 'First name'),
			new EmailField('Email', 'Email address')
		);

		$actions = new FieldSet(
			new FormAction('doForm', 'Submit')
		);

		$validator = new RequiredFields(
			'FirstName',
			'Email'
		);

		parent::__construct($controller, $name, $fields, $actions, $validator);
	}

	function doForm($data, $form) {

		// Create a new member instance, loading all the form data in
		$member = new Member();
		$form->saveInto($member);

		// Set the member password and write with all the form data collected to DB
		$member->Password = Member::create_new_password();
		$member->write();

		$form->sessionMessage('Thanks, you have been signed up!', 'good');
		Director::redirectBack();
	}

}

Hope that helps.

Generally a module would be great, although it would need to be fairly abstract to allow for all combination of fields that a user can sign up with.

Sean