I haven't tried this yet but I read in a library book to just take an old sweater, felt it down a bit (will give instructions below). Cut off the sleeves and cut a slit up the center front. Then continue felting until it's the size you want. If you have a front loader this could take MANY wash cycles. If you have a top loader it should go quickly. Then you can take some yarn and do a simple blanket or mattress stitch around the edges in a contrasting color and you could embellish it if you want with some embroidery or something.
To felt: use hot water, always add to the cycle other items (jeans are best) because it needs the rubbing against other items to actually felt. Be careful not to add items that will leave little fur balls on your wool (towels, for example). If you have a top loader, let it agitate a few minutes, then check, repeat until done. If you have a front loader it may take forever to felt something. I'm currently felting some mittens, slippers, and bowls and some of them have been washed at least 6 times and are still not finished! Once it's the right size, shape and let dry. If you shrink it too much, you can try to stretch it out while it's still wet.
This should be a very simple project, but with felting you never know how it will come out in the end. Let us know how it turns out!!!