Here's a felted bag I made for my friend Lindsey for her birthday. I made it last December and stayed up late to finish it the night before we left (out of state for a visit). I entered it in the 2009 Knitting Pattern a day contest but haven't heard yet if it's been accepted. Here's the pattern:
Yarn: KnitPicks Wool of the Andes Bulky, 2 skeins grape
Gauge: 3 sts & 5 rows = 1" in garter st on size 15 (10 mm) circular needle
Finished Dimensions: height: 6.75," width at top: 14," depth at base: 4.5"
Cast on 16 sts. K in garter st until 8 1/2." BO and weave in ends. Beginning with a short side, pick up and knit 16 sts along each short edge and 21 sts along each long edge using circular needle (74 total sts). Join in the round and place marker at each corner. P next row. Continuing in garter st, m1 at the beg and end (1 st in) of each side of rectangle every 14th row 2 times, then once the foll 6th row. P next row and BO. For handles, CO 4 sts, then knit in garter st until 11." BO. Sew handles in place (as in picture), and weave in ends.
To felt, place bag in pillow case and tie closed. Wash with a pair of jeans for agitation, with woolwash or shampoo on the hot/cold cycle of your washing machine. Check periodically until the bag is the dimensions listed or desired size. Let dry with stuffing to keep the bag's shape.