She is super cute! I totally want one :) how about wool felt? Do you have the Wee Wonderful book? Super cute with some great ideas, like ribbon hair :)
Wool felt was my first thought, too. Another thing you can do is use wool yarn to sew it on, then there's a stiff bristle brush you use to fluff the yarn. It's an embroidery technique I saw in this book: http://www.amazon.com/Kyuuto-Japanese-Crafts-Embroidery-Crewelwork/dp/0811860868/ref=sr_1_15?ie=UTF8&qid=1296060327&sr=8-15Along the lines of what Amy said, too, you could do it with silk ribbon embroidery, and purlsoho has started to carry the ribbon thread for that (it was hard to find for a while). Or you could try to sew the hair from black dupioni silk? They had it at JoAnn's recently.
For the hair I would do felt, but cover it in yarn or embroidery floss to make individual strands over it.
Though I am learning to sew (Colonial period clothing, thanks to my dear friend), I must say it is one of the most difficult things I have done in my life! :) Looking forward to the finished doll soon.