Through previous experience as a middle school Reading teacher, I think the best way to group students for literature circles is by ability levels. The book should be chosen based on the reading level of the group. Each group member has a daily job to do. This could include titles such as: summarizer, vocabulary enricher, connector, discussion director, and character tracer. Basically each member is breaking apart the story based on their jobs. At the beginning of class everyone takes turns sharing their findings with the literature circle group. This helps all members to develop a higher understanding of different aspects of the literature circle book. The job duties can switch daily.
The discussion director creates thought provoking questions for the group and everyone discusses. As a connector the responsibilities include finding connections between the book and the real world. The summarizer tells the main idea (who, what, when, where, why, and how). The vocabulary enricher finds and defines words that are interesting, unusual, or difficult. Finally the character tracer looks for adjectives to describe the main character or character(s).
As a teacher you can create any jobs for the students based on the story. I've even had students hold the job of illustrator. Please check out the book from Amazon. It has job duties for elementary and middle school students.