Q:

What do I need in a lens for studio portrait photography? 

I'm going to start in photography and I'm looking to build a home photography studio.  I'm planning to get a Canon 60D (wished for a 7D though).  I'd like to find out what are the recommended lenses for shooting, mostly portraits, in studio.  I have the option of the Canon 18-135mm IS or 17-85mm lens bundle.  Or should I rather buy the body only and then buy a lens separate?  I have a budget of $400-$500 for a standalone lens.  
I plan to shoot mostly in studio but will want to shoot outside as well. 

A:

With you budget considered, there isn't a lot of point in purchasing a body and lens separately right now.  Yes, there is an argument to be made that buying a 50mm prime lens can solve a certain class of problems at a very low price, but it's not a panacea, and one of the advantages that people keep tossing about (the shallow depth of field and relatively large bokeh) is not really much of an issue in studio photography unless you're doing something wrong. ( You have control of the background.  If it's busy, it's your fault, not the lens's.) 
There are higher-quality, "better" lenses available for your application, but they're well beyond your current budget.  A single prime lens, or even a pair or trio of prime lenses, is not the answer either; it will tremendously restrict the kinds of pictures you can shoot effectively.  If you want to use primes, you'd pretty much need to have a full range of somewhere between 21mm and 100-135mm for all of the various types of shots that would, rightly or wrongly, be called "portrait" shots in the current sloppy vernacular. 
Babies and toddlers crave close-in views with wider-angle lenses.  Beauty shots (and, checking ModelMayhem, it seems that about every fifth girl on the planet thinks she's a model, not matter what she looks like) need longer lenses to fit current expectations.  Something in the headshot vein needs something in the 50mm (horizontal) to 75mm (vertical) range to get you about the right distance from your subject. 
And that's the real key: the distance between you and your subject.  Different types of photographs of different types of people call for different camera-to-subject distances.  If you want someone to seem approachable, you're not going to make that happen by shooting them from a distance.  Kids at a distance look like they're having fun if they're having fun, otherwise they'll look a little lost and forlorn — somebody else's kid, which is the last thing a parent wants.  Some pictures will call for intimacy, some for a little bit of formal space, and some for "you ain't in her league, buddy".  And yes, it will take some time and effort on your part to see which focal length works best when.  Anyone who tells you that there is a "definitive portrait lens" is guessing, and guessing wrongly. 
You will never miss the difference between 17mm and 18mm in studio, but you will, for sure, miss the difference between 85mm and 135mm.  If you later decide to augment that lens, then a 50mm prime, a 30-35mm prime and an 85mm prime, in that order, will give you the ability to play a dangerous game of shallow DoF when you want at relatively little cost.  But with the kit discount, you really can't go wrong starting with the 18-135.