I am setting up web application development environment on my localhost. I am used to use WAMP server but I noticed Zend Server which looks promising. I am developing both Zend Framework and non framework applications.
Which of these two would you suggest? Is there another option?
I would suggest an environment which is closer if not equal to your production environment. This way you'll prevent possible problems on going live.
Zend server is good if you have the pro. version because it has a debuger you can link to your IDE (Zend Studio) and a lot of nice features, but it depends on the size of your project.
Zend Server is quite expensive for small / personal projects
I suggest Zend Framework. It has lots of components that you can use in your projects. With these components development process becomes very easy and faster.
Assuming you mean WampServer.com, then that's not what I'd call a "development environment". However it is great for running everything locally, and with the latest version you can install the exact Apache/PHP/MySQL versions you have on your server (and even switch between them if you have different servers and set-ups). You get a very close simulation of a live server.
As for development, personally I prefer a basic text editor (e.g. Notepad++ on Windows or KATE on Linux), but there are other good IDEs like Eclipse or Aptana Studio. There are numerous questions here on SO with IDE recommendations.
Desicion help for chosing the right AMP stack:
Summary: If you don't need compatibility with some older PHP versions or extensions, use Zend Server Community Edition, if you want a quick and stable solution with low configuration needs, use a version of XAMPP, if you want flexibility and know what you're doing use WAMP or even better set up your own environment.
If you're mainly developing Zend Framework applications, I'd go with Zend Server CE.