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.
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.
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.
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.
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[ 279 ms ] story [ 1463 ms ] threadhttp://www.archive.org/details/netlabels
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
[1] http://puredata.info
http://www.istockphoto.com/audio.php
it also mentions a book that presumably discusses the algorithms. book: http://mitpress.mit.edu/catalog/item/?ttype=2&tid=10661
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/