DancingHen, those mittens are a great idea. I've also seen funky children's hats made from felted sweaters selling in boutique selling for $$$$$$.
I knit, and I recently saw (can't remember where though!) a free pattern for knitting mittens extra loose and large out of wool, and knitting the cuffs, in the child's actual size, out of a non-felting blend, and then felting them. That way the mitten part felts and gets really thick and warm, but the cuff part stays stretchy and keeps the mitten on the child's hand (of course this could be done for an adult as well).
If you want to knit something to felt, you knit extra large and extra loose. You use needles a couple sizes larger than the yarn calls for. And the yarn has to be 100% wool.
I saw a great felted diaper bag pattern in a knitting book by Melanie Falick that might interest any knitters here. It looked like something one could maybe piece together from old sweaters, too. I can find the title of the book if anyone wants it.