KnitPicks.com has dyeable Wool of the Andes, which has been very popular on this forum. You'd have to ask the others about whether it's itchy or not. I do know that it's mostly used for felting.
I personally know gals from my knitting group who have had marvelous results when dyeing this yarn with Kool-Aid.
If you DO order from knit picks, make sure you click through from this site, Amy gets credit!