I am thinking in terms of the child and his feeling of security. Obvioously it is his security blanket and he does not care how it looks. Let him pick the yarn for another blanket and maybe knit a square from yarn from the other blanket into it to that the first blanket is in the second blanket. Explain to him that the blanket is worn out and needs to rest just like when he gets really tired and sleepy. Involve him in the process so that he makes the transition without trauma.
BTW: I crocheted a blanket for a baby shower gift 3 years ago before I learned to knit. Every Sunday morning, I see that blanket at church with that little red-haired girl who wont go anywhere without it. Thankfully, I used a sturdy yarn!
OTN:Oddball baby blanket
OTH: Hat to match scarf
FO: (C)Scarf for International Swap, 12 chemo hats this month, 2 Oddball blanket sections
ITB-too many UFO's LOL!!!!