I have plans to do the same thing - I knit the sweater 20+ yars ago, it really barely fits 20 years later. I wore it anyway last winter to an ice skating party and afterwards washed it and shurnk....er, I mean felted it... by mistake.
So mad at myself I tossed it in the 'goodwill' bag. A few days later I realized I had the beginnings of a great felted purse/bag so I pulled it back out to keep. I finally found the handles I wanted to use - sort of this, but the bar across the bottom is longer: http://www.yarnmarket.com/yarn/Fashi...ndle-2898.html
It still sits in the "I'm going to make this one day" pile, but I really will.....eventually. I think the front/back will make the front/back & sides of the purse, the ribbing around the bottom of the sweater will be the bottom of the purse. I thought about using the sleeves for the handle, but bought some instead.
I'm thinking if I cut open the sleeves into flat pieces I may have a 2nd, smaller purse, too.