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Although loose-fitting shirts and shorts are fine for yoga classes, avoid your baggiest t-shirts and sweats. Loose clothes will fall over your head when you bend, and they make it difficult for an instructor to see whether your alignment is correct.
To find the yoga wear that's right for you, try this: Reach, bend, and twist in front of the mirror if you are not sure whether to wear certain clothes for yoga. Do you feel comfortable with the amount of skin that is exposed as you move around? Are you covered when you sit on the floor with your legs spread in a v-shape? Tops and pants or shorts made from a stretchy fabric that fit fairly close to the body are your best bets for yoga wear that will keep you comfortable and let you concentrate on your practice.