Actually, washing wool fibers in hot water is what felts them, not the drying process. The fibers, being natural, are made up of "scales" that expand along the hair fiber when heated, then when cooled they contract. By putting the wool in hot water and expanding the scales, then agitating it to push the fibers together, when it cools it shrinks and binds together more snugly.
Here's more info on felting knitted fabric:
http://www.knitty.com/ISSUEwinter02/FEATfelting.html
I haven't made diaper covers out of recycled sweaters yet, but I did pick up a few from Goodwill last night that look promising. I picked a few different weights from a very thin GAP sweater to a more substantial sweater-coat so I can experiement and see which works best. Since my son isn't a very heavy wetter I can probably get away with a thinner cover that flexes more.
Here are a few of the sweaters I'm looking at turning into wool covers for my son...I think they'll look a lot nicer on his bum than as sweaters!

This is the thinnest one, I'm curious to see how much it shrinks and how thick the resulting fabric is:
http://img.photobucket.com/albums/v1..._felt_body.jpg
This one is a mid-weight sweater and boy is it ugly:
http://img.photobucket.com/albums/v1..._felt_body.jpg
This one is the clear winner, though. I think argyle will look cute as a diaper cover, but what an unfortunate sweater! It's somewhat thick so we'll see how usable it is once I felt it. If all else fails I can make a totebag out of it instead:
http://img.photobucket.com/albums/v1..._felt_body.jpg
What pattern did you find for soakers? I would be very interested in seeing it, I've been looking for one, too! I want to felt my fabric, then cut and sew it to make a Biobottoms type of cover, I haven't been able to find a good pattern yet.
Definitely post your progress, we can learn from one another!
- Jen