I knit rugs all the time! Mostly for the bathroom, but I did a large area rug 6.75' x 5.5' in strips.
http://www.knittinghelp.com/forum/at...1&d=1179367260
http://www.knittinghelp.com/forum/at...1&d=1179367260
I have felted all 8 of the rug I have made.
One of my next projects is to make a piece of yardage (60" wide after felting) to upholster a club chair an ottoman.