That .65 sounds like overkill for a 48" Mustang. Is that in the recommended size range for that aircraft? If not, you may have balance issues to be worked out before flying. This also sounds like your first plane, due to your question, so I'm going to throw a question at you, is this the Mustang trainer or something else?

Now, getting to the props, I agree, the choises are mind numbing. So lets look at various props:
Pusher props....As the name says, it pushes, so the engine needs to be at the back of the aircraft. These are normally used for canard or jet style planes where the designer doesn't want a prop in the front to spoil the look or aerodynamics
Variable pitch...A prop that can change blade angles while in flight. These are used on 4D and some of the more complex aircraft, but not really needed on your Mustang
Carbon Fiber props... A basic prop made from carbon fiber. Very strong but can be easily broken due to it's stiffness
Wood props...Normally used on scale aircraft, it's a basic prop formed from a piece of wood. Temperature and humidity can affect these, so if you're fairly new to the hobby, save some money and stick to the synthetic props
Nylon and glass filled...Your general prop. They come in a wide range of styles and sizes. These are less expensive than wood or C/F and are not weather sensitive like wood.

Now, lets look at sizes. You said the engine calls for a 12X8 prop. This is how it works:
12 is the length of the prop from tip to tip. The importance here is how much room you have to swing the prop. If you don't have more than 6" between the center of the engine shaft and the ground when the plane is level(tail wheel off the ground and wings level with the ground), your prop won't work because it will be hitting the ground.
8 is what is referred to as pitch. Pitch is how far forward the prop will move the plane forward in one complete rotation, measured in inches.

Why do the instructions say to use this size prop? To make it easy, the manufacturer designed the engine to run at a maximum speed. Using this size will keep the engine below that speed due to the weight and drag from the prop blades, thus preventing engine damage. At the same time, by going to a larger prop can damage the engine by overloading it, in the same way you can stall a car by starting from a stop in 3rd gear rather than 1st.

2 Blades or 3? This is where it starts getting confusing. A 2 bladed prop is, in general, more efficient than a 3 or 4 blade. This is due to each blade going through cleaner air, undisturbed by the other blade. The more blades you have, the more disturbed the air is, so each blade pulls less. Also, the more blades you have, the harder it is to balance a prop. Instead of balancing across two directions, now you have to do three or four directions instead. Stick with two blades for the time being