in order to get it to stop dying your clothes, put it in a vinegar soak. here is good instructions on getting the stacinators to stop bleeding: **Note** Dark colored wool will bleed.
*tip* For bleeding wool, mix 3 cups white vinegar with 3tbsp salt, wet wool in lukewarm water, add to vinegar/salt mixture. Microwave for two, 3minute sessions. Allow to COMPLETELY cool, rinse in lukewarm water, wash, re-lanolize. (if you rinse before allowing to completely cool, you may unintentionally felt your garment)
now, as far as the smell, My guess would be that either the cover is not well lanolized (the lanolin goes through a chemical reaction with urine, neutralizing ammonia and converting the urine to pure water) or is not being stuffed sufficiently, or both. I would try using a good spray lanolin on it after also using a lanolin wash, and see if that helps.
Also, I would make sure that your child doesn't have a UTI as that can make their urine stink.