Not long ago, there was quite the discussion on one of the forums I belong to on the distinction between "felting" and "fulling" wool. Both types of fabric are created by subjecting the wool to soapy hot water, agitation, & a cold water rinse. I believe that the distinction between the two types (& the different terms to describe them) has to do with the state of the wool BEFORE it is subjected to the water & agitation process.
I maintained (& still do) that what I do is more properly called "fulling," which harkens back to the days when blanket weavers would boil their woven wool blankets. The hot water caused the wool threads to swell, creating a fabric that was smooth, dense, & very strong. Fulled wool feels nicer on the skin (less itchiness) & the denser fabric was also warmer.
"Felting," on the other hand, uses unspun wool roving which is created by building up thin layers of roving, alternating the direction of the fibers on each layer. Thin felt may only contain two layers, thick felt (such as you might use for a felt hat) is generally 6 alternating layers, or more. This mat of loose fibers is then subjected to the hot soapy water & a hand agitation process which causes the layers to adhere to one another.
In creating most of my felt handbags, I begin by knitting or crocheting the wool yarn into a fabric (similar to the process of the weaver). This is a fabric, in & of itself, that is functional even before the fulling process. The mat of unspun roving is not usable unless it is felted. Once I have the knitted/crocheted fabric completed, my washing machine filled with hot soapy water provides the agitation & the last cold water rinse.
Check out this link to see a comprehensive step-by-step demonstration on felting wool - http://www.ebsqart.com/artMagazine/za_287.htm