Needle felting is right up there with knitting as a hand-held craft that can be done (provided you're careful) almost anywhere. Wool roving is felted by repeatedly moving a barbed needle through the wool and into a foam base.
In addition to the regular needle felting items, Maiwa Supply also sells these delightful kits. They contain everything you need to make two small animals. The animals are about the size of christmas ornaments (and if you add your own threads they could easily be hung from the tree.)
Just a note that although these animals are adorable, needle felting involves the use of a sharp needle and so is not suitable for young children. Here are some other kits available in the store.