1. Find a clean reference image. Those oversize "vector" renders are excellent. Clean it up with "surface blur" if there is surface noise.
2. Reduce palette (Image -> Mode -> Indexed Color). Choose Local/Adaptive palette; As few colors as you can have without visible artifacts - usually 30-40; White matte; No dither). This initial reduction helps get rid of some downsampling artifacts, especially around antialiased edges.
3. Bring image back to RGB mode (Image -> Mode -> RGB Color). It won't change visually -- pattern reduction has already been applied.
4. Adjust image brightness. Use "Levels" adjustment (Image -> Adjustments -> Levels) and bring the output levels down until image's white matches Minecraft's white. (0 - 179) range works for me, but this can be tweaked depending on the level. Gamma should be adjusted to darken the image a bit, to 0.80-0.65 range. Alternative that sometimes works better is "Brightness/Contrast" adjustment. Bringing brightness down to -75% produces an equivalently dark image.
5. Resize image down to desired size (Image -> Image Size...). Use "Nearest neighbor" resampling method.
6. Reduce palette to Minecraft colors only (Image -> Mode -> Indexed Color). Select "Custom" palette and load it from file.
7. You should now have a rough pixelated image, in Minecraft colors. You may need to go back and redo the levels/brightness adjustment step a few times to get best conversion results. I also sometimes combine conversions at different gammas, if I cannot get the desired color split in one conversion (as you can see me doing in the video below at 0:07-0:10 mark).
8. Manually fix any discontinuities, missing detail, wrong colors, etc. This is the time-consuming bit, and it takes some practice. But this is what makes the difference between generated and handcrafted pixelart. (This video shows the process, sped-up, for a different picture -- I didn't record one for this picture.)
9. Build it in Minecraft!