August's recommendation: The Canterbury Tales, by Geoffrey Chaucer.
Provided you get a good translation, you don't have to look very far past the surface to realize that The Canterbury Tales are in fact a collection of cracking good stories.
The setup, for those of you who have forgotten high school English class or haven't reached it yet, is a fairly classic one. A group of pilgrims are on their way to Canterbury, and have been talked into a wager wherein each of them will tell a total of four stories (two on the way there, two on the way back). At the end, whoever has told the best story will get a nice dinner bought for him.
Unfortunately for us, Chaucer only ever got through twenty-four of the stories. As there are twenty-nine pilgrims, you see that he fell far short of the desired total. Still, the stories we got are a fantastic assortment, spanning the entire gamut of contemporary genres, echoing and inverting one another, and playing off the personalities (the very vivid personalities) of the pilgrims until you could, as some people have, build an entire career off of analyzing everything that's going on in this collection.
So, for example, if the high-flown no-holds-barred anachronistic chivalry of "The Knight's Tale," with its saga of two ancient Greek fellows who fall in love with the same woman and go to truly stupid lengths to determine which one of them has a claim to her, is not to your taste, then you can skip along to the R-rated practical jokes of "The Miller's Tale," where you may observe red-hot pokers going places they really shouldn't go. Or if you want straight-up violence without much in the way of sexual innuendo, then you can read "The Pardoner's Tale," where a bunch of guys murder each other over gold and don't even see the irony in their own deaths. Entertainment hasn't actually changed much in the last six hundred years (or probably even longer than that). As a friend of mine said, it's still all about sex, violence, and fart jokes.
By paying attention to the "General Prologue" that opens the collection, you can also get a good sense of the storytellers -- and you'd better believe that who they are has bearing on what stories they tell, and how they tell them. While I wouldn't go so far as to credit the pilgrims with the same degree of characterization you see in modern fiction, they're vivid and detailed. The Wife of Bath in particular is an outrageous figure, though you have to continue on to the Prologue to her tale to see that in full.
I said above that a good translation is important, because while The Canterbury Tales is certainly a work of English literature, the English in question is Middle, not Modern. It's readable, but not entirely easy, and there are definitely nuances you will miss (unless, for example, you recognize "queynt" as a Middle English term for female genitalia). To my mind, a good edition of The Canterbury Tales will be one that renders the Middle English into a modern equivalent that will let you see the humour, the pomposity, the raunchiness, and all the other characteristics that make the stories and the interjections of the frame story (of the pilgrims on the road) so entertaining. In this particular instance, I prioritize tone over the preservation of the meter and rhyme of the original. But, of course, language geek that I am, I also like being able to see the Middle English for comparison, so I specifically give a thumbs-up to the version published by A. Kent Hieatt and Constance Hieatt, which gives you a more-or-less poetic (in the sense of being broken into lines) rendition in Modern English, with the facing pages showing the original. It's very readable and fun. The one downside to that collection, though, is that it only includes a small selection of the tales -- eight of them, to be specific. I haven't read widely enough, though, to recommend any particular translation that includes all of the tales.
If you approach The Canterbury Tales as a reader, then you'll be entertained. But if you're a writer -- and one of my purposes in doing "folklore" recommendations is to familiarize more fantasy writers with primary sources -- then what are you likely to get out of The Canterbury Tales? I can think of a few possibilities. To begin with, you could use it as a model for a series of your own short stories; Chaucer's hardly the only writer who ever used the gimmick of a frame story (the Decameron also comes to mind). Some of the stories, like "The Franklin's Tale," might also be amenable to adaptation as short fiction. And finally, if you're a worldbuilder like I am, it can be very useful to see some examples of the kinds of stories told in medieval times. You'll see both the differences and the similarities: the style of narration may have changed, but when you get down to it, it's still about sex, violence, and fart jokes.