I do a lot of different things with wool. If it's thick, or has an allover pattern that I think will felt up funny, I don't try shrinking it at all, and usually leave sweaters for soakers & pants completely unfelted so they still have stretch. For wraps, I use thinner sweaters that use finer wool - my favorites are Gap or J. Crew lambswool sweaters. Those I run through the washing machine and dryer on hot a few times, to get them to shrink up nicely.
I haven't used the fitted patern on the site to make covers, so I can't help much in that respect. The only wool wraps I have made are the ones from my pattern line. I'm also not sure what could be the trouble with the recycled wool that you had leaking. In my experience, wool only leaks if the diaper under it is not stopping the urine from blasting through and dripping out of the diaper itself. SOME wool will resist drips and dribbles, but in general wool sweater-knit will not. So, in most cases, the fault lies with the diaper, not the wool when you get leaking with wool covers.
I don't think the small diaper would fit a tiny newborn. It would be good for about 10lbs and up, but you'd want something smaller for a brand new baby. You ca apply the same recycling techniques to any other diaper out there, so if you can find a good newborn pattern, give that a try. Most of my babies were 9lbs+ to start out with, so I haven't had to do the teeny baby thing in a while!