Although it is impossible to catalog all the choices for yarn and patterns for knitting baby items, here are a few resources you can use to jumpstart your planning process. Please feel free to add your two cents in the comments.
Knitting Pattern Central's Baby Page
Knitty Kidwear Archive
Monkeysuits: Sweaters and More to Knit for Kids by Sharon Turner
Mason-Dixon Knitting by Kay Gardiner, Ann Meador Shayne
Lots of Debbie Bliss Books
Lots of Rowan Books
Lots of Dale of Norway Books
Yarns for Baby Items
I know a lot of knitters will disagree with me but any fiber is suitable for babies. It is only a question of how the parents will maintain the baby items you worked so hard to make. In addition, yarns labeled "Baby Yarn" are not the only yarns suitable for knitting baby items. Here is a list of yarn recommendations make by knitting community members.
Lion Brand Cotton Ease
Dale of Norway Baby Ull yarn
Rowan Yarns Calmer
Tahki Yarns Cotton Classic
Rowan Handknit Cotton
Brown Sheep Cotton Fleece
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