Here’s some advice I was given once regarding felting: There are three factors that cause felting. Generally, two out of three of the factors must happen at the same time to cause felting. Those three things are: moisture, agitation, and heat. But remember, it takes two out of three. So, if you hand wash in cold water, very gently wring it out, and let it air dry away from direct sunlight, it (probably) won’t felt. If this blanket will be used gently by adults (i.e. it’s not a baby blanket) and you’re okay with the extra care of hand washing and air drying, then you should be okay to use your wool yarn.
You said you don’t like the feel of it, though, so if I were in your shoes, this is what I would do – knit a small swatch, hand wash it, and let it air dry. See if the wool softens up, sometimes it does. Then you can decide from there how to proceed.
To answer your question about yarn that won’t felt, generally you want to look for yarns labeled “superwash” or washable wool. These are usually blends that have just enough other fibers to make them machine washable (and sometimes dryable) and prevent felting. Personally, I’ve worked with Lion Brand Wool-Ease and Lion Brand Lion’s Pride Woolspun and I really like both. They get very soft after they’re washed and come in lots of nice colors.
Good luck with your blanket!