warneral, I've been using the merino wool flannel from fabric.com--the trick has been figuring out how to prepare it so that it felts up just the right amount. The first batch I did got so thick that it was a one layer cover or nothing, and it was tough to even do elastic b/c the wool was so thick.
The appliques are a combination of jersey and flannel, whatever scraps I have.
I didn't use any stabilizer, just a little wash-out fabric glue to baste the appliques down while I sewed. One of the nice things abou wool (in contrast to fleece) is that the wool actually kind of sticks to itself (think felt board).
And yes, it's a two-layer cover..I find those the easiest to sew b/c the elastic just gets sandwiched in the middle, and you don't have to deal with binding, which I'm terrible at.
Have you made your wool cover yet? Do it, do it!
And throkmorton, actually my dd is recently out of diapers, so I'm scheming for another way to get felted and appliqued wool on her...probably a wool jacket (although I'm intrigued by the quilt idea..I've never seen a wool quilt. Does it have wool batting? Cotton? As long as I can TIE it, I don't have the patience for the actual quilting part.