I'm doing something similar for friends. I'm using Homespun Living Debbie's waffle knit dishcloth
, knit in Bernat Handicrafter Holiday Twists. They're turning out quite nicely.
I'm also knitting potholders to go with them from Lion Cotton red yarn. The pattern is on the Lion Brand website, but it's very simple. Using size 7 needles, with three strands of worsted cotton yarn held together, cast on 28 sts, and work in garter stitch (knit every row) until it measures about 8" from the beginning of your work.
When binding off, leave the last stitch on the left needle, knit it, then switch to a crochet hook and knit a hanging loop- ch 10, sl st to base st of ch.
You could also knit a mug cozy and/or some coasters.