Definitely felt! I'm sure everyone has ruined a sweater once and not realizing that they've actually felted! Take a look at my first felted project...a wine cozy. The pattern is compliments of Lydia at Dropped a Stitch. I used Caron Felt-It yarn in Adobe.
I definitely will be making more of these. You can knit this in a couple of hours. They make great housewarming gifts. R and I will be taking that bottle out of that cozy and enjoying that wine. Cakebread Cellars is one of the few wineries in Napa Valley that ship to Louisiana, so R and I jumped at that chance and joined their Bakers Club.