OK there are a few good shops in London.
First, forget about Liberty's - I was wholly disappointed with the knitting department - it has shrunk hugely!
John Lewis - Oxford Street - big and they have moved to an upper floor (4th I think) and expanded.
Loop - Islington. Very very good but a bit pricey IMO - it is rather trendy
Creations - Barnes
Creations - Chiswick
These two shops are owned by Jean and she is brilliant. She is extremely helpful; as are her staff. They will open at off hours if you need them and they know who you are. Jean does a lot of knitting for Cancer Research UK - bags are her thing. My first felted bag I gave to Jean to sell for Cancer Research at her Dorset knit group/.
Stash Yarns - Putney. This is a recently opened store run by two women who ran the South West London Stitch N Bitch group. They decided to open a store themselves. I've not yet been to the shop but I have heard good things about it.
I heard about a shop in Notting Hill - its down the back and is actually a haberdashers. Its near Monsoon (opposite it actually) the 328 bus goes past it. I've not been in there but have seen it from the bus - hard to see in but have been tempted to leap off the bus and be late for work just so I could have a look. One day I will =D