I am almost finished knitting a large, hobo-like bag that I am going to felt. I am using Lana Grossa Colore yarn , and it has been a total joy to knit with. The colors are gorgeous, and when the bag is felted, it takes on an almost watercolor look when the stitches fade away and the color transitions blend. I saw the bag worked up at a Stitches event and had to buy the yarn and pattern, even though it was almost $80 in materials once I got all the needles, etc.
It is my first attempt at felting, but I am loving the whole idea. I admit to being a bit nervous to throwing it into the washer, but I ordered two felting books off Amazon which (very timely) arrived yesterday. The thorough directions for the felting (or "fulling" process, according to the Bev Galeskas book) really have set me at ease. The other book is called "Pursenalities.." and I have marked about six absolutely darling bags that I have got to make. There are various styles and sizes, and some call for novelty yarns while others rely on the patterning for detail and interest. I think the books are very inspiring, and I would recommend checking the ideas out (is the book in your local library?) and picking a smaller bag that would be less expensive to produce.
The best part is having a great bag to carry around, and some fabulous gift projects to get started!