These have become a baby shower staple for me now. They take only about 2 hours to complete and take very little yarn, so they make great gifts. I stuffed mine with scraps of Warm and Natural batting left over from quilts, but you could use fabric or yarn scraps as well.
Book: Knitting for Baby: 30 Heirloom Projects with Complete How-to-Knit Instructions by Melanie Falick and Kristin Nicholas
Yarn: Cascade 220 various colors