Felting is an age old craft ( http://en.wikipedia.org/wiki/Felt ) and there are several ways to accomplish it. You need a natural fiber that hooks to itself when friction is applied: wool is most widely used. The wool is cleaned and carded and dyed or left natural. Many Etsy shops have a variety of batting and roving available but mainstream stores like Joann's has a small supply too.
To felt, one may use wool, water and friction, while shaping it to the desired end product (wet felting). Or use a specialized needle and repetitive motion, again while shaping it to the desired end product (needle felting). Or shape something first by knitting or crocheting then wet felt it by hand or washing machine.
I am working on a set of rainbow bowls. I purchased bulky hand plant dyed rainbow yarn from Mama Judes Etsy shop http://www.etsy.com/listing/99865268/bold-complex-rainbow-yarn-4-ounce. I knitted up a very quick bowl pattern from the book: One Skein by Leigh Radford. There are also many free patterns online.
It looks like a hat doesn't it?
I used size 15 double pointed needles. I prefer wood needles, I enjoy the warm feel of natural wood in my hands rather than cold steel. My maternal grandmother taught me to knit and I remember the clickety-clack of her metal needles and remember it fondly. She was an intuitive knitter, very seldom using a pattern. I treasure some baby garments she knitted for my daughter.
As you can see in this photo the stitches are very visible before felting.
Here is another bowl I did previously and the stitches disappear after felting.
I am going to toss the rainbow bowl in to the washing machine with a natural laundry soap, as I did with this green bowl. I may then add some embellishments (beads, embroidery or buttons) but I may not. The pattern of the rainbow colors may be sufficient.
I will post a photo when the bowl is "done".