Hacham Ovadia Yosef, in his work Hazon Ovadia (Sukkot, p. 74), discusses the obligation to decorate the Sukka. He cites in this context the Gemara’s comment in Masechet Shabbat (133b) that the verse "This is my God, and I shall glorify Him" (Shemot 15:2) means that we should perform Misvot in a beautiful manner. The Gemara lists numerous examples of this obligation, such as ensuring to use a beautiful Sukka, Lulab, Shofar, Tallit and Sefer Torah. Adorning these articles shows respect and affection for these Misvot as well as to God, who commanded us to perform them.
The Rashba (Rabbi Shlomo Ben Aderet of Barcelona, Spain, 1235-1310) added another reason for this obligation, namely, that one must treat his Sukka like his home. Just as a person does not leave his walls empty, and instead decorates the home to make it pleasant and appealing, one must similarly adorn and decorate his Sukka so that he finds it pleasant to live in.
Therefore, as Hacham Ovadia writes, it is customary to place pictures or decorative posters and the like on the walls of the Sukka, and to hang fruits and other decorations from the Sechach. One must, however, ensure that the decorations do not hang lower than four Tefahim (handbreadths) – approximately one foot – from the Sechach. So long as the decorations are within four Tefahim of the Sechach, they are "Battel," or "nullified," by the Sechach. But if they extend lower than four Tefahim from the Sechach, then they are seen as an independent entity, which could disqualify the Sukka. This problem often arises with chains that are sold as Sukka decorations. One must ensure not to let them hang lower than four Tefahim from the Sechach.
Those who have the custom to hang pictures of Rabbis and other people in their homes may do so in the Sukka, as well. There are those who refrain from hanging pictures in their homes, based on Kabbalistic teaching, and the Ben Ish Hai (Rabbi Yosef Haim of Baghdad, 1833-1909) indeed ruled stringently on this issue. Hacham Ovadia, however, allowed hanging pictures of people in one’s home, and this is indeed the accepted practice in our community. Hence, it is permissible to hang pictures of Rabbis in the Sukka, as well.
Is it permissible to use in the Sukka decorations that were manufactured as decorations for Non-Jewish holidays?
Hacham Ovadia rules that one may use these kinds of decorations in his Sukka, based upon the principle of "Hazmana Lav Milta Hi." This means that merely designating an item for a certain purpose does not affect its Halachic status. As such, one who goes to a store and purchases a decoration, which clearly had never before been used, may use it to adorn the Sukka. Even though it was manufactured for the purpose of a non-Jewish holiday, this intent has no effect upon it as far as Halacha is concerned.
Of course, this is not to say that one may bring a pumpkin into his Sukka as a decoration. Quite obviously, it is inappropriate to use as a Sukka decoration an item that is clearly identified with a Non-Jewish holiday. We speak here only of decorations that have no clear association with a Non-Jewish holiday, but were manufactured for that purpose. These decorations may be used in the Sukka, since they were never actually used as part of a non-Jewish religious celebration.
Summary: It is a Misva to adorn the Sukka with decorations. One must ensure not to allow decorations to hang lower than a foot from the Sechach. It is permissible to hang pictures of Rabbis and other people in the Sukka. One may use in the Sukka decorations that were manufactured to be used on Non-Jewish holidays, provided that they have no obvious association with a holiday. (Thus, for example, one should not adorn his Sukka with a pumpkin.)