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.
Baby Patterns
Knitting Pattern Central's Baby Page
Knitty Kidwear Archive
Magknit's 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
Bernat Cottontots
Lion Brand Cotton Ease
Superwash Wool
Dale of Norway Baby Ull yarn
RYC Cashsoft
Rowan Yarns Calmer
Rowan Denim
Tahki Yarns Cotton Classic
Rowan Handknit Cotton
Plymouth Dreambaby
Plymouth Encore
Brown Sheep Cotton Fleece
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