Natural Life Magazine is all about using yarn cut from tee shirts for a bunch of fun projects.
Here are some links to ideas and people mentioned for further reading.
Fair Trade source for recycled Sari yarns
History of Rag Rugs
Rag Rug how-to
A bit about Shabby Chic
Cate Blanchett wears granny squares
Belly Dancing Tassels
Knifty Knitter Looms