Please refer to page nine of:

http://media.digikey.com/pdf/Data Sheets/Sharp PDFs/S108,208T01.pdf

Is this diode needed - why/why not?

How do I choose the correct diode, if yes?

 

Presumably it's included to prevent any inadvertent damage due to significant polarity reversal of the photo-diode.

Just about any common diode would suffice. Provided there is sufficient limiting resistance in series with the input drive path everything should be OK.